Empirical Analyses of Monetary and Credit Policies
Saturday, Jan. 6, 2018 10:15 AM - 12:15 PM
- Chair: Helene Rey, London Business School
The Transmission of Monetary Policy Shocks
AbstractDespite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely mis specified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles.
Forward Guidance and Macroeconomic Outcomes Since the Financial Crisis
AbstractThis paper studies the effects of Federal Open Market Committee (FOMC) forward guidance. We begin by using high frequency identification and direct measures of FOMC private information to show that puzzling responses of private sector forecasts to movements in federal funds futures rates on FOMC announcement days can be attributed entirely to Delphic forward guidance. However a large fraction of futures rates' variability on announcement days remains unexplained, leaving open the possibility that the FOMC has successfully communicated Odyssean guidance. We then examine whether the FOMC used Odyssean guidance to improve macroeconomic outcomes since the financial crisis. To this end we use an estimated medium-scale New Keynesian model to perform a counterfactual experiment for the period 2009:Q1−2014:Q4, in which we assume the FOMC did not employ any Odyssean guidance and instead followed its reaction function from before the crisis as closely as possible while respecting the effective lower bound. We find that a purely rule-based policy would have delivered better outcomes in the years immediately following the crisis than FOMC forward guidance did in practice. However starting toward the end of 2011, after the Fed's introduction of “calendar-based” communications, the FOMC's Odyssean guidance appears to have boosted real activity and moved inflation closer to target. We show that our results do not reflect Del Negro, Giannoni and Patterson (2015)'s forward guidance puzzle.
The Federal Reserve and Market Confidence
AbstractWe discover a novel monetary policy shock that has a widespread impact on aggregate financial conditions and market confidence. Our shock can be summarized by the response of long-horizon yields to Federal Open Market Committee (FOMC) announcements; not only is it orthogonal to changes in the near-term path of policy rates, but it also explains more than half of the abnormal variation in the yield curve on announcement days. We find that our shock is positively related to changes in real interest rates and market volatility, and negatively related to market returns and mortgage issuance, consistent with policy announcements affecting market confidence. Our results demonstrate that Federal Reserve pronouncements influence markets independent of changes in the stance of conventional monetary policy.
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit