The Macroeconomic Impact of Quantitative Easing in the Euro Area
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The Making of Contemporary Australian Monetary Policy – Forward Or
Advances in Economics, Business and Management Research (AEBMR), volume 37 International Conference on Transformations and Innovations in Management (ICTIM-17) THE MAKING OF CONTEMPORARY AUSTRALIAN MONETARY POLICY – FORWARD OR BACKWARD LOOKING? Ying Chen SHU-UTS SILC Business School, Shanghai University, P.R.China Maoguo Wu SHU-UTS SILC Business School, Shanghai University, P.R.China Abstract: Monetary authorities rarely disclose their true reasons for their policy reactions. Tracing the policy reaction function to see if the monetary authority is using simple rules would offer profound insight into the past behavioral relationship between the monetary authority and economic agencies. A reasonable body of knowledge about the direction of monetary policy would assist economic agencies’ expectations, which would in turn, be useful for the monetary authority in anticipating the likely trends for the general economy. The main objective of this study is to extend de Brouwer and Gilbert (2005) as from the Australian financial deregulation era (from 1983 to 2002) to the present. Empirical findings show that the Reserve Bank of Australia (RBA) is forward looking when formulating monetary policy rather than backward looking, and that inflation targeting plays a significant role in stabilizing the output of the economy. Keywords: backward looking, forward looking, generalized method of moments JEL code: E52 1. Introduction According to RBA charter, monetary policy is the central instrument for maintaining low, stable inflation, stabilizing the home currency, preserving full employment level, maintaining the economic prosperity and welfare of the citizen and maximizing the sustainability of economic growth. Most major central banks use an overnight cash rate1 as the tool of policy. -
Quantitative Easing and Inequality: QE Impacts on Wealth and Income Distribution in the United States After the Great Recession
University of Puget Sound Sound Ideas Economics Theses Economics, Department of Fall 2019 Quantitative Easing and Inequality: QE impacts on wealth and income distribution in the United States after the Great Recession Emily Davis Follow this and additional works at: https://soundideas.pugetsound.edu/economics_theses Part of the Finance Commons, Income Distribution Commons, Macroeconomics Commons, Political Economy Commons, and the Public Economics Commons Recommended Citation Davis, Emily, "Quantitative Easing and Inequality: QE impacts on wealth and income distribution in the United States after the Great Recession" (2019). Economics Theses. 108. https://soundideas.pugetsound.edu/economics_theses/108 This Dissertation/Thesis is brought to you for free and open access by the Economics, Department of at Sound Ideas. It has been accepted for inclusion in Economics Theses by an authorized administrator of Sound Ideas. For more information, please contact [email protected]. Quantitative Easing and Inequality: QE impacts on wealth and income distribution in the United States after the Great Recession Emily Davis Abstract In response to Great Recession, the Federal Reserve implemented quantitative easing. Quantitative easing (QE) aided stabilization of the economy and reduction of the liquidity trap. This research evaluates the correlation between QE implementation and increased inequality through the recovery of the Great Recession. The paper begins with an evaluation of the literature focused on QE impacts on financial markets, wages, and debt. Then, the paper conducts an analysis of QE impacts on income, household wealth, corporations and the housing market. The analysis found that the changes in wealth distribution had a significant impact on increasing inequality. Changes in wages were not the prominent cause of changes in GINI post-recession so changes in existing wealth appeared to be a contributing factor. -
QE Equivalence to Interest Rate Policy: Implications for Exit
QE Equivalence to Interest Rate Policy: Implications for Exit Samuel Reynard∗ Preliminary Draft - January 13, 2015 Abstract A negative policy interest rate of about 4 percentage points equivalent to the Federal Reserve QE programs is estimated in a framework that accounts for the broad money supply of the central bank and commercial banks. This provides a quantitative estimate of how much higher (relative to pre-QE) the interbank interest rate will have to be set during the exit, for a given central bank’s balance sheet, to obtain a desired monetary policy stance. JEL classification: E52; E58; E51; E41; E43 Keywords: Quantitative Easing; Negative Interest Rate; Exit; Monetary policy transmission; Money Supply; Banking ∗Swiss National Bank. Email: [email protected]. The views expressed in this paper do not necessarily reflect those of the Swiss National Bank. I am thankful to Romain Baeriswyl, Marvin Goodfriend, and seminar participants at the BIS, Dallas Fed and SNB for helpful discussions and comments. 1 1. Introduction This paper presents and estimates a monetary policy transmission framework to jointly analyze central banks (CBs)’ asset purchase and interest rate policies. The negative policy interest rate equivalent to QE is estimated in a framework that ac- counts for the broad money supply of the CB and commercial banks. The framework characterises how standard monetary policy, setting an interbank market interest rate or interest on reserves (IOR), has to be adjusted to account for the effects of the CB’s broad money injection. It provides a quantitative estimate of how much higher (rel- ative to pre-QE) the interbank interest rate will have to be set during the exit, for a given central bank’s balance sheet, to obtain a desired monetary policy stance. -
To What Extent Did Monetary Policy Contribute Towards the Recent Financial Crisis and Subsequent Recession in the US and UK?
International Research in Economics and Finance; Vol. 3, No. 2; December, 2019 ISSN 2529-8038 E-ISSN 2591-734X Published by July Press To What Extent did Monetary Policy Contribute Towards the Recent Financial Crisis and Subsequent Recession in the US and UK? Tao Hu1 & Ceri Davies1 1 University of Birmingham, UK Correspondence: Tao Hu, 3/77 Albion Road, Box Hill, VIC 3128, Australia. Tel: 61-47-877-6275. Received: October 25, 2019 Accepted: November 14, 2019 Online Published: December 15, 2019 doi:10.20849/iref.v3i2.691 URL: https://doi.org/10.20849/iref.v3i2.691 Abstract This essay researches the question, “To what extent did monetary policy contribute towards the recent financial crisis and subsequent recession in the US and UK?” This article begins by demonstrating monetary policy’s role in guiding the economy’s development under different economic fundamentals. Then the essay puts forward the existence of possibility that monetary policy may cause potential dangers for the economy. In the next chapter, the essay illustrates the guideline for monetary policy namely Taylor rule and economists’ arguments and explanations for the US monetary policy in the past decade. In chapter 3, this article estimates the nominal interest rates for both the US and the UK based on Taylor rule for different periods and illustrates influences of monetary policy actually taken for each country in different periods. In chapter 4, the article tests the relationship between monetary policy’s deviations from Taylor rule and financial imbalances by using the OLS method and explains results. Finally, in chapter 5, the article concludes that in some degree monetary policy’s deviations from Taylor rule prescriptions contribute to a build-up of financial imbalances. -
HOW DID QUANTITATIVE EASING REALLY WORK? a New Methodology for Measuring the Fed’S Impact on Financial Markets
HOW DID QUANTITATIVE EASING REALLY WORK? A New Methodology for Measuring the Fed’s Impact on Financial Markets Ramin Toloui Stanford Institute for Economic Policy Research [email protected] SIEPR Working Paper No. 19-032 November 2019 ABSTRACT This paper introduces a new methodology for measuring the impact of unconventional policies. Specifically, the paper examines how such policies reshaped market perceptions of how the Fed would behave in the future—not merely the expected path for policy rates, but how the central bank would adjust that path in response to different combinations of future inflation and growth. In short, it studies how quantitative easing affected investor beliefs about the future policy reaction function. The paper (1) proposes a novel model of market expectations for the central bank’s future policy reaction function based on the Taylor Rule; (2) shows that empirical estimates of the model exhibit structural breaks that coincide with innovations in unconventional policies; and (3) finds that such policy innovations were associated with regime shifts in the behavior of 10-year U.S. Treasury yields, as well as unusual performance in risk assets such as credit spreads and equities. These findings provide evidence that a key causal channel for unconventional policies was via their impact on market expectations for the Fed’s future policy reaction function. These shifts in expectations, in turn, appear to have had larger, more persistent, and more pervasive effects across financial markets than found in previous studies. Monetary economics today is obsessed with balance sheets—and rightfully so. More than ten years after the global financial crisis, policy interest rates remain exceptionally low in much of the industrialized world. -
Central Bank Liquidity Tools and Perspectives on Regulatory Reform ECONOMIC POLICY REVIEW
Federal Reserve Bank of New York August 2010 August Economic Volume 16 Number 1 16 Number Volume Policy Review Special Issue: Central Bank Liquidity Tools and Perspectives on Regulatory Reform ECONOMIC POLICY REVIEW EDITOR Kenneth D. Garbade COEDITORS Meta Brown Marco Del Negro Jan Groen Stavros Peristiani Asani Sarkar EDITORIAL STAF F Valerie LaPorte Mike De Mott Michelle Bailer Karen Carter PRODUCTION STAFF Carol Perlmutter David Rosenberg Jane Urry The Economic Policy Review is published by the Research and Statistics Group of the Federal Reserve Bank of New York. Articles undergo a comprehensive refereeing process prior to their acceptance in the Review. The views expressed are those of the individual authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. www.newyorkfed.org/research EDITOR’S NOTE The papers in this special volume of the Economic Policy Review all focus on the theme of a 2009 conference on central bank liquidity tools organized by the Federal Reserve Bank of New York: the evaluation of central bank programs implemented to address funding shortages in the markets. Indeed, readers interested in detailed summaries of the conference papers and their discussions will find the overview by Matthew Denes and his coauthors very informative. Two of the papers presented at the conference are included in this volume: the studies by Stephen G. Cecchetti and Piti Disyatat and by Erhan Artuç and Selva Demiralp. Both papers examine the past actions of central banks in the financial crisis. Cecchetti and Disyatat consider the implications that recent financial developments may have for the fundamental nature of central banks’ lender-of-last-resort function and whether the traditional tools at policymakers’ disposal remain effective in the face of modern liquidity crises. -
The Response of Short-Term Bank Lending Rates to Policy Rates: a C1rnss-Cmmtry Perspective1
- 106 - The response of short-term bank lending rates to policy rates: a c1rnss-cmmtry perspective1 Claudio E.V. Borio alll.d Wilhelm Fritz Bank for International Settlements I. INTRODUCTION The issue of the size and speed of the response of bank lending rates to changes in policy-controlled interest rates represents an important dimension of the transmission mechanism of monetary policy. Bank lending rates are a key, if not the best, indicator of the marginal cost of short term external funding in an economy. Moreover, they can also provide useful information about developments in the average cost of borrowing, to a degree that depends on agents' reliance on short term or adjustable rate financing at those rates. Such opportunity cost and cash-flow effects are two of the main channels through which monetary policy impulses are transmitted to the rest of the economy. This explains concerns related to the widening of lending spreads in those countries experiencing extensive balance-sheet restructuring in the financial and non-financial sectors during the latest recession, especially in some Anglo-Saxon and Nordic countries as well as in Japan. It is also part of the reason for the short-term difficulties in defending external parities in the face of rapid adjustments oflending rates to policy-controlled rates brought to light by the ERM crisis in the autunrn of 1992. The following study compares the response of key short-term bank lending rates to policy rates in all the countries covered by the project on the transmission mechanism for which appropriate data were available; Austria and Switzerland are excluded. -
How Would Modern Macroeconomic Schools of Thought Respond to the Recent Economic Crisis?
® Economic Information Newsletter Liber8 Brought to You by the Research Library of the Federal Reserve Bank of St. Louis November 2009 How Would Modern Macroeconomic Schools of Thought Respond to the Recent Economic Crisis? “Would financial markets and the economy have been better off if the Fed pursued a policy of quantitative easing sooner?” —Daniel L. Thornton, Vice President and Economic Adviser, Federal Reserve Bank of St. Louis, Economic Synopses The government and the Federal Reserve’s response to the current recession continues to be hotly de bated. Several questions arise: Was a $780 billion economic stimulus bill appropriate? Was the Troubled Asset Re lief Program (TARP) beneficial? Should the Fed have increased the money supply sooner? Should Lehman Brothers have been allowed to fail? Some answers to these questions lie in economic theory, and whether prudent decisions were made depends on whom you ask. This article examines three modern schools of economic thought and how each school would advise was the best way to respond to the most recent crisis. The New Keynesian Approach New Keynesian economics, the “new” version of the school based on the works of the early twentieth- century economist John Maynard Keynes, is founded on two major assumptions. First, people are forward looking; that is, they use available information today (interest rates, stock prices, gas prices, and so on) to form expectations about the future. Second, prices and wages are “sticky,” meaning they adjust gradually. One example of “stickiness” is a union-negotiated contract, which is fixed for a definite period of time. Menus are also an example of price stickiness: The cost associated with reprinting menus causes a restaurant owner to be reluctant about replacing them. -
04 Deflation Trap and Unconventional Mon
DEFLATION TRAP AND MONETARY POLICY Stefania Paredes Fuentes [email protected] Department of Economics, S2.121 University of Warwick Money & Banking WESS 2016 DEFLATION TRAP • CB adjusts the nominal interest rate in order to affect the real interest rate - It must take into account expected inflation i = r + πe • Nominal interest rate cannot be below zero - Zero lower bound (ZLB) min r πe ≥− Stefania Paredes Fuentes Money and Banking WESS 2016 THE 3-EQUATION MODEL AND MACROECONOMIC POLICY 2009 2011 Inflation in Industrialised Economies 2000-2015 Stefania Paredes Fuentes Money and Banking WESS 2016 DEFLATION TRAP r A r =re IS π y PC(πE= 2%) π =2% A MR ye y Stefania Paredes Fuentes Money and Banking WESS 2016 DEFLATION TRAP r Large permanent negative AD shock B A r =re y IS’ IS π PC(πE= 2%) π =2% A ye y MR Stefania Paredes Fuentes Money and Banking WESS 2016 DEFLATION TRAP Large permanent r negative AD shock B A rs i = r + πE y r’0 C’ i = rs - 0.5% IS IS’ min r ≥ - πE π PC(πE= 2%) E PC(π 1= 0.5%) π =2% A C’ ye π0 = -0.5% B MR Stefania Paredes Fuentes Money and Banking WESS 2016 DEFLATION TRAP Large permanent r negative AD shock i = r + πE B A min r ≥ - πE rs C min r = r0 = -0.5% y1 y’1 y r’0 C’ IS IS’ π PC(πE= 2%) E PC(π 1= π0) π =2% A C’ ye y π0 B MR π1 C Stefania Paredes Fuentes Money and Banking WESS 2016 DEFLATION TRAP Large permanent r negative AD shock i = r + πE B A E rs min r ≥ - π X r’s C min r = r0 = -0.5% y1 y’1 y r’0 C’ IS IS’ π PC(πE= 2%) E PC(π 1= π0) π =2% A C’ ye y π0 B MR π1 C Stefania Paredes Fuentes Money and -
Central Bank Tools and Liquidity Shortages
Stephen G. Cecchetti and Piti Disyatat Central Bank Tools and Liquidity Shortages 1.Introduction After providing our definitions, in Section 3 we proceed with a discussion of the tools that central banks have at their he global financial crisis that began in mid-2007 has disposal and how they might be tailored to address each type of Trenewed concerns about financial instability and focused liquidity shortage. Section 4 offers a brief description of how attention on the fundamental role of central banks in recent actions by major central banks can be interpreted from preventing and managing systemic crises. In response to the this perspective; Section 5 concludes. We note at the outset that turmoil, central banks have made extensive use of both new and our focus is on central bank liquidity operations and not on existing tools for supplying central bank money to financial policymakers’ interest rate responses. institutions and markets. Against this backdrop, there has been intense interest in the implications that recent financial developments may have for the fundamental nature of central banks’ lender-of-last-resort (LOLR) function and whether the 2. Liquidity Shortages and traditional tools that have been at policymakers’ disposal the Lender of Last Resort remain adequate in the face of modern liquidity crises. This paper addresses these issues, and in doing so provides a view of Apart from the conduct of monetary policy, a vital recent central bank liquidity operations that is tied more closely responsibility of central banks in most countries is to perform to their underlying purpose from the LOLR perspective. -
How QE Works: Evidence on the Refinancing Channel
How Quantitative Easing Works: Evidence on the Refinancing Channel⇤ § Marco Di Maggio† Amir Kermani‡ Christopher J. Palmer August 2019 Abstract We document the transmission of large-scale asset purchases by the Federal Reserve to the real economy using rich borrower-linked mortgage-market data and an identifica- tion strategy based on mortgage market segmentation. We find that central bank QE1 MBS purchases substantially increased refinancing activity, reduced interest payments for refinancing households, led to a boom in equity extraction, and increased aggre- gate consumption. Relative to QE-ineligible jumbo mortgages, QE-eligible conforming mortgage interest rates fell by an additional 40 bp and refinancing volumes increased by an additional 56% during QE1. We estimate that households refinancing during QE1 increased their durable consumption by 12%. Our results highlight that the transmis- sion of unconventional monetary policy to the real economy depends crucially on the composition of assets purchased and the degree of segmentation in the market. ⇤Apreviousversionofthispaperwascirculatedunderthetitle,“UnconventionalMonetaryPolicyand the Allocation of Credit.” For helpful comments, we thank our discussants, Florian Heider, Anil Kashyap, Deborah Lucas, Alexi Savov, Philipp Schnabl, and Felipe Severino; Adam Ashcraft, Andreas Fuster, Nicola Gennaioli, Robin Greenwood, Sam Hanson, Arvind Krishnamurthy, Stephan Luck, Michael Johannes, David Romer, David Scharfstein, Andrei Shleifer, Jeremy Stein, Johannes Stroebel, Stijn Van Nieuwerburgh, An- nette Vissing-Jørgensen, Nancy Wallace, and Paul Willen; seminar, conference, and workshop participants at Berkeley, Chicago Fed, Columbia, NBER Monetary, NBER Corporate Finance, Econometric Society, EEA, Fed Board, HEC Paris, MIT, Northwestern, NYU, NY Fed/NYU Stern Conference on Financial Intermedi- ation, Paul Woolley Conference at LSE, Penn State, San Francisco Fed, Stanford, St. -
How Quantitative Easing Works: Evidence on the Refinancing Channel
Harvard | Business | School Project onThe Behavioral Behavioral Finance Finance and and Financial Financial Stabilities Stability Project Project How Quantitative Easing Works: Evidence on the Refinancing Channel Marco Di Maggio Amir Kermani Christopher Palmer Working Paper 2016-08 How Quantitative Easing Works: Evidence on the Refinancing Channel⇤ § Marco Di Maggio† Amir Kermani‡ Christopher Palmer December 2016 Abstract Despite massive large-scale asset purchases (LSAPs) by central banks around the world since the global financial crisis, there is a lack of empirical evidence on whether and how these pro- grams affect the real economy. Using rich borrower-linked mortgage-market data, we document that there is a “flypaper effect” of LSAPs, where the transmission of unconventional monetary policy to interest rates and (more importantly) origination volumes depends crucially on the assets purchased and degree of segmentation in the market. For example, QE1, which involved significant purchases of GSE-guaranteed mortgages, increased GSE-eligible mortgage origina- tions significantly more than the origination of GSE-ineligible mortgages. In contrast, QE2’s focus on purchasing Treasuries did not have such differential effects. We find that the Fed’s purchase of MBS (rather than exclusively Treasuries) during QE1 resulted in an additional $600 billion of refinancing, substantially reducing interest payments for refinancing households, lead- ing to a boom in equity extraction, and increasing consumption by an additional $76 billion. This de facto allocation of credit across mortgage market segments, combined with sharp bunch- ing around GSE eligibility cutoffs, establishes an important complementarity between monetary policy and macroprudential housing policy. Our counterfactual simulations estimate that re- laxing GSE eligibility requirements would have significantly increased refinancing activity in response to QE1, including a 35% increase in equity extraction by households.