79 research outputs found
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Inflation and inflation uncertainty in the United Kingdom: Evidence from GARCH modelling
This paper examines the relationship between inflation-uncertainty and the impact of
inflation targeting using British data over the period 1972-2002. Uncertainty is proxied using the
estimated conditional volatility from symmetric, asymmetric, and component GARCH-M models of
inflation. The results indicate a positive relationship between past inflation and current uncertainty.
We control for the indirect effect of lower average inflation throughout the last decade of inflation
targeting and find that the adoption of an explicit target eliminates inflation persistence and reduces
long-run uncertainty. Monetary authorities of implicit targeting countries should consider the extra
benefits associated with formal targets
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Should Monetary Policy Respond to Asset Price Misalignments?
This paper analyses the relationship between monetary policy and asset prices using a structural
rational expectations model that allows for the effect of asset prices on aggregate demand. We assume that
asset prices follow a partial adjustment mechanism whereas they are positively affected by past changes,
thus allowing for ‘momentum trading’, while at the same time we allow for reversion towards
fundamentals. We then conduct stochastic simulations using two alternative monetary policy rules,
inflation-forecast targeting and the standard Taylor rule. The results indicate that, under both rules, interest
rate setting that takes into account asset price misalignments leads to lower overall macroeconomic
volatility, as measured by the postulated loss function of the central bank
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Optimal Monetary Policy and Asset Price Misalignments
This paper analyses the relationship between monetary policy and asset prices in the context of
optimal policy rules. The transmission mechanism is represented by a linearized rational expectations
model augmented for the effect of asset prices on aggregate demand. Stabilization objectives are
represented by a discounted quadratic loss function penalizing inflation and output gap volatility. Asset
prices are allowed to deviate from their intrinsic value since they may be positively affected by past price
changes. We find that in the presence of wealth effects and inefficient markets, asset price misalignments
from their fundamentals should be included in the optimal interest rate reaction function
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Has monetary policy reacted to asset price movements? Evidence from the UK
This paper examines the relationship between monetary policy and asset
prices in the context of empirical policy rules. We begin our analysis by establishing
the forecasting ability of house and stock price changes with respect to future
aggregate demand. We then report estimates of monetary policy reaction functions for
the United Kingdom over the period 1992-2003. We find that UK policymakers
appear to take into account the effect of asset price inflation when setting interest rates
with a higher weight being assigned to property market fluctuations. Asset inflationaugmented
rules describe more accurately actual policy, and the results are robust to
modelling the effect of the Bank of England independence
The euro and inflation uncertainty in the European Monetary Union
In this paper, we investigate empirically the relationship between inflation and inflation uncertainty in twelve EMU countries. We estimate a time-varying parameter model with a GARCH specification for the conditional volatility of inflation in order to distinguish between short-run (structural and impulse) and steady-state uncertainty. We then introduce a dummy variable to model the policy regime shift which occurred in 1999 with the introduction of the Euro, and its effects on the links between inflation and inflation uncertainty. We find that steady-state inflation has generally remained stable (with the important exception of Germany, where the trend has become positive), steady-state inflation uncertainty and inflation persistence have both increased, and the relationship between inflation and inflation uncertainty has broken down in many countries. These findings cast doubt on the optimistic view taken by the ECB concerning its success in controlling inflation, and suggest the need for improvements in its analytical framework
Monetary Policy Shocks and Stock Returns: Evidence from the British Market
This paper examines the impact of anticipated and unanticipated monetary policy announcements, of the Bank of England’s Monetary Policy Committee on UK sectoral stock returns. The monetary policy shock is generated from the change in the three-month sterling LIBOR futures contract. Using a panel GMM estimator we find that both the expected and unexpected components of monetary changes are significant, but that only the surprise term is significant when we control for the impact of the sectors financial position
Monetary Policy and Corporate Bond Returns
We investigate the impact of monetary policy shocks (the surprise change in the Fed Funds rate (FFR)) on excess corporate bonds returns. We obtain a significant negative response of bond returns to FFR shocks. This effect is especially strong in the period before the 2007- 09 financial crisis and for bonds with longer maturity and lower rating. We show that the largest portion of this response is related to higher expected excess bond returns, especially term premia news. Therefore, the discount-rate channel represents an important mechanism through which monetary policy affects corporate bonds. However, the financial crisis has attenuated this effect
Household portfolios and monetary policy
We show that expansionary monetary policy is associated with higher household portfolio allocation to high risk assets and lower allocation to low risk assets, in line with “reaching for yield” behaviour. Our findings are based on analysis of US household level panel data using two measures of monetary policy shifts over the period 1999-2007. We also show that the impact of monetary policy changes is stronger for active investors. In addition, our hurdle model estimates reveal that monetary shocks strongly affect the decision to hold high risk assets, but not the decision to hold low risk assets. Finally, our results highlight the role of self-reported risk attitudes as well as that of mortgage-holder status in affecting the response of household portfolios to monetary policy changes
Household portfolios and financial literacy: The flight to delegation
In this paper we analyse the asset allocation of European households, focusing on developments during the period that followed the recent twin financial crises. We examine whether “search for yield” materialises outside financial institutions and whether the degree of financial literacy plays a role. We consider a wider set of alternatives to the safe assets by incorporating mutual funds to the standard set of stocks and bonds. We provide novel evidence which suggests that the “search for yield” during the post-crisis period of low interest rates took place not by raising the direct holdings of stocks and bonds, but rather indirectly through higher mutual funds’ holdings, in line with a “flight to delegation”. Importantly, this behaviour is strongly linked to the level of financial literacy, with the most literate households displaying significantly higher use of mutual funds
Life satisfaction and austerity: expectations and the macroeconomy
This paper examines the linkages between fiscal austerity and life satisfaction across thirteen European countries using a sample of repeated cross-sections of individuals from 1999 to 2009. Austerity policies may trigger several responses at both the macro and micro-level, which in turn may affect life satisfaction directly or indirectly. We employ a structural equation modelling approach to account for these complex relationships linking austerity to life satisfaction, the macroeconomic environment, an individual's expectations, and the probability of becoming unemployed. We find that austerity is inversely associated with life satisfaction, with a substantial effect operating through an increase in the unemployment rate. In all of the specifications there is also strong evidence of austerity dampening optimism about the future
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