Monetary Policy Alternatives at the Zero Bound: an Empirical Assessment
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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. -
Fed Thoughts: an Apt Place and an Awkward Time
September 2019 Fed Thoughts: An Apt Place and an Awkward Time Vincent Reinhart | Chief Economist & Macro Strategist The story holds that the Economic Symposium at Jackson Hole run by the Federal Reserve Bank of Kansas City (FRBKC) achieved its iconic status for a simple reason: former Federal Reserve (Fed) Chair Paul Volcker loved fly fishing. When the FRBKC chose the venue by happenstance, Volcker signed up immediately. But once he was on the agenda, other Fed governors and Reserve Bank presidents elbowed in. So many policymakers in one place attracted media, and the private sector viewed it as a hot and increasingly hard-to-get ticket. The rest followed. To be fair, FRBKC guidance on content helped but happenstance as history is always a winning narrative. Whatever the reason, central bankers should retreat to mountains once a year, as four lessons from backpacking apply to their jobs. First, a path through the mountains looks much clearer from a distance than up close on the ground. That is, viewed from the lobby of the Jackson Lake Lodge, most routes look obvious. In 2018, the Fed had a straightforward map to raise rates that turned out to be increasingly harder to follow as the year advanced. The reason, the second point, is that local conditions matter, including changeable weather and the volume of other foot traffic on the trail. The Fed’s turn-of-the-year redirection of policy owed to officials discovering that they were pushing against an opposing flow of investors. Third, gravity matters, which is why the way up the mountain is a slow slog compared to the way down. -
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. -
No 523 the Evolution of Inflation Expectations in Canada and the US by James Yetman
BIS Working Papers No 523 The evolution of inflation expectations in Canada and the US by James Yetman Monetary and Economic Department October 2015 JEL classification: E31, E58 Keywords: Inflation expectations, decay function, inflation targeting BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements <2015>. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISSN 1682-7678 (online) The evolution of inflation expectations in Canada and the US James Yetman1 Abstract We model inflation forecasts as monotonically diverging from an estimated long-run anchor point towards actual inflation as the forecast horizon shortens. Fitting the model with forecaster-level data for Canada and the US, we identify three key differences between the two countries. First, the average estimated anchor of US inflation forecasts has tended to decline gradually over time in rolling samples, from 3.4% for 1989-1998 to 2.2% for 2004-2013. By contrast, it has remained close to 2% since the mid-1990 for Canadian forecasts. Second, the variance of estimates of the long-run anchor is considerably lower for the panel of Canadian forecasters than US ones following Canada’s adoption of inflation targets. -
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 -
Evaluating Central Banks' Tool
Evaluating Central Banks' Tool Kit: Past, Present, and Future∗ Eric Sims Jing Cynthia Wu Notre Dame and NBER Notre Dame and NBER First draft: February 28, 2019 Current draft: May 21, 2019 Abstract We develop a structural DSGE model to systematically study the principal tools of unconventional monetary policy { quantitative easing (QE), forward guidance, and negative interest rate policy (NIRP) { as well as the interactions between them. To generate the same output response, the requisite NIRP and forward guidance inter- ventions are twice as large as a conventional policy shock, which seems implausible in practice. In contrast, QE via an endogenous feedback rule can alleviate the constraints on conventional policy posed by the zero lower bound. Quantitatively, QE1-QE3 can account for two thirds of the observed decline in the \shadow" Federal Funds rate. In spite of its usefulness, QE does not come without cost. A large balance sheet has consequences for different normalization plans, the efficacy of NIRP, and the effective lower bound on the policy rate. Keywords: zero lower bound, unconventional monetary policy, quantitative easing, negative interest rate policy, forward guidance, quantitative tightening, DSGE, Great Recession, effective lower bound ∗We are grateful to Todd Clark, Drew Creal, and Rob Lester, as well as seminar participants at the Federal Reserve Banks of Dallas and Cleveland and the University of Wisconsin-Madison, for helpful comments. Correspondence: [email protected], [email protected]. 1 Introduction In response to the Financial Crisis and ensuing Great Recession of 2007-2009, the Fed and other central banks pushed policy rates to zero (or, in some cases, slightly below zero). -
Election Matters
September 2020 Election Matters Vincent Reinhart | Chief Economist & Macro Strategist Elections matter. Every fall in the United States during a year divisible by four, everyone frets over the national election and prognosticates about its consequences. The two political parties position themselves to make the outcome close, a possibility made more likely in the presidential contest by the peculiar arithmetic of the Electoral College. Because the primary process typically drives candidates to the wings of their parties, prospective policies offer dramatically distinct choices. And power in Washington depends on control over both the White House and Capitol Hill, making multiple down-ticket races important. The combination of small differences in odds, big differences in professed programs, and potential amplification effects from Congressional races complicates framing an economic outlook and investment strategy. This note lays out a framework for understanding the policy consequences of election results, stressing both yawning differences and surprising similarities across the potential outcomes. The framework helps to understand why the decibel volume is, for now, much louder on the political than the business news channels. As of this writing, President Trump trails badly in the polls, with an aggregator placing his expected share of the vote at 43 percent. Similarly, an electronic market puts heavy weight on a “Blue Wave” in which the Democrats retain the House and take back the Senate. However, bettors appear to have improved their opinion that Trump wins the election to almost even money. Another obvious caution is that four years ago candidate Trump was faring even more poorly in the polls, and there was widespread talk of an ascendant Democratic majority. -
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. -
June 2020 Ph.D., Columbia University, New York, 1988. Advisor
June 2020 CARMEN M. REINHART CURRICULUM VITAE EDUCATION Ph.D., Columbia University, New York, 1988. Advisor: Robert Mundell. Doctoral Dissertation: “Real Exchange Rates, Commodity Prices, and Policy Interdependence.” M. Phil., 1981 and M.A., Columbia University, New York, 1980. B.A., Florida International University, Miami, 1978. PROFESSIONAL POSITIONS Chief Economist and Vice President, World Bank, Washington DC, June 2020- Minos A. Zombanakis Professor of the International Financial System, Harvard Kennedy School, July 2012 – Dennis Weatherstone Chair, Peterson Institute for International Economics, Washington DC, 2011 – June 2012. Director, Center for International Economics, 2009-2010; Professor, School of Public Policy and Department of Economics, 2000 – 2010; Director, International Security and Economic Policy Specialization, 1998 – 2001; Associate Professor School of Public Policy, University of Maryland, 1996 – 2000. Senior Policy Advisor and Deputy Director, Research Department, 2001 – 2003. Senior Economist and Economist, 1988 - 1996, International Monetary Fund. Chief Economist and Vice President, 1985 – 1986; Economist, March 1982 - 1984, Bear Stearns, New York. AWARDS AND HONORS Karl Brunner Award, Swiss National Bank, planned September 2021. Mundell-Fleming Lecture, International Monetary Fund, planned November 2020. Economica, Coase-Phillips Lecture, London School of Economics, London, May 2020. FIMEF Diamond Finance Award, Instituto Mexicano de Ejecutivos de Finanzas, Mexico, August 2019. Homer Jones Memorial Lecture, St. Louis Federal Reserve, July 2019. Thomas Schelling Lecture, University of Maryland, April 2019. Carmen M. Reinhart Pa ge 1 King Juan Carlos Prize in Economics, December 2018. Wiki. Bernhard Harms Prize, Kiel Institute for the World Economy. October 2018. Adam Smith Award, National Association of Business Economists, September 2018. William F. Butler Award, New York Association for Business Economists, September 2017.