The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks

It is common practice to estimate the response of asset prices to monetary policy actions using market-based measures of monetary policy shocks, such as the federal funds futures rate. I show that because interest rates and market-based measures of monetary policy shocks respond simultaneously to all news and not simply news about monetary policy actions, market-based measures of monetary policy shocks yield biased estimates of the response of interest rates to monetary policy actions. I propose a methodology that corrects for this "joint-response bias." The results indicate that the response of Treasury yields to monetary policy actions is considerably weaker than previously estimated. In particular, there is no statistically significant response of longer-term Treasury yields before February 2000 and no statistically significant response of any Treasury rate after.Prices ; Monetary policy ; Federal funds rate

Measuring the Effects of Monetary Policy in the Euro Area: The Role of Anticipated Policy

This paper investigates within a SVAR framework the effects of anticipated monetary policy in the euro area. Building on a procedure recently proposed by Cochrane yielding the response of output to an anticipated monetary policy impulse, we show that in the past twenty years anticipated monetary policy had a considerable influence on output. Moreover, we compute the output effects of the systematic monetary policy response to aggregate demand and supply shocks. We find that monetary policy pursues a counter-cyclical policy in response to demand shocks and is pro-cyclical with regard to supply shocks, even though there are considerable lags.Vector Autoregression, Systematic Monetary Policy, Historical Decomposition

Does monetary policy have differential state-level effects? an empirical evaluation

The paper examines whether monetary policy has similar effects across major states in the Indian polity. Impulse response functions from an estimated Structural Vector Auto Regression (SVAR) reveal two sets of states: a core of states that respond to monetary policy in a significant fashion vis-à-vis others whose response is less significant. The paper attempts to trace the reasons for the differential response of these two sets of states in terms of financial deepening and differential industry mix.monetary policy; regional effect; optimum currency area

Is the response of output to monetary policy asymmetric? evidence from a regime-switching coefficients model

This paper investigates regime switching in the response of U.S. output to a monetary policy action. We find substantial, statistically significant, time variation in this response, and that this time variation corresponds to "high response" and "low response" regimes. We then investigate whether the timing of the regime shifts are consistent with three particular manifestations of asymmetry by modeling the transition probabilities governing the switching process as a function of state variables. We find strong evidence that the regime shifts can be explained by whether the economy is in a recession at the time the policy action was taken. In particular, policy actions taken during recessions seem to have larger effects than those taken during expansions. We find much less evidence of any asymmetry related to the direction or size of the policy action. (Formerly titled: "When Does Monetary Policy Matter? Evidence from an Unobserved Components Model with regime Switching")Monetary policy ; Business cycles

Can Opacity of a Credible Central Bank Explain Excessive Inflation?

Excessive inflation is usually attributed to the lack of central bank’s credibility. In this context, most of the literature considers transparency a means to establish central bank’s credibility. The contribution of this paper is twofold. First, it shows that, even in the absence of inflationary bias, a credible central bank may find it optimal to implement an accommodating monetary policy in response to cost-push shocks whenever the uncertainty surrounding its monetary instrument is high. Indeed, the degree of central bank’s transparency influences the effectiveness of its policy to stabilize inflation in terms of output gap, and thereby whether it will implement an expansionary or contractionary policy in response to cost-push shocks. Second, it stresses that transparency is not just a means to achieve credibility but is essential per se for the optimality of monetary policy of a fully credible central bank

Effectiveness of Nitrate Policy in Flanders (1990-2003): Modular Modelling and Response Analysis

The impact of current nitrate policy measures in Flanders is estimated. A modular modelling system has been developed for comparing response and pressure indicators and for decomposing the response impact of policy measures. Compared to 1990, the internalised manure surplus is reduced to zero, whereas the distance to target of the soil surface balance to the water quality standard dropped only with 58%. Source-linked and sink-related measures each account for about the half of the manure surplus reduction. The impact of abatement technologies is minor. The modular approach helps to unravel the discrepancy between pressure and response and to propose policy alternatives.abatement technology, DPSIR scheme, nitrogen pollution reduction, Agricultural and Food Policy, B41, C51, H21, K32,

Fiscal Shocks and the Exchange Rate in a Generalized Redux Model

This paper studies how the interaction between the monetary policy regime and the degree of home bias in public consumption affects the exchange- rate response to fiscal shocks in a generalized version of the Redux model of Obstfeld and Rogoff (1995). We show that the joint presence of home bias in public consumption and endogenous monetary policy overturns the result of the Redux model implying an exchange-rate appreciation in response to an expansionary fiscal shock

Monetary policy and natural disasters in a DSGE model: how should the Fed have responded to Hurricane Katrina?

In the immediate aftermath of Hurricane Katrina, speculation arose that the Federal Reserve might respond by easing monetary policy. This paper uses a dynamic stochastic general equilibrium (DSGE) model to investigate the appropriate monetary policy response to a natural disaster. We show that the standard Taylor (1993) rule response in models with and without nominal rigidities is to increase the nominal interest rate. That finding is unchanged when we consider the optimal policy response to a disaster. A nominal interest rate increase following a disaster mitigates both temporary inflation effects and output distortions that are attributable to nominal rigidities.Monetary policy - United States ; Natural disasters - Economic aspects