Monetary policy and asset prices: the investment channel

The role of monetary policy during periods of asset price volatility has been the subject of discussion among economists and policymakers at least since the 1920s and the Great Depression that followed. In this paper we survey the recent and rapidly growing literature on this topic, with an emphasis on the investment channel. We present a detailed discussion of the hypotheses that have been used to justify, or criticise, a response to asset prices. These hypotheses concern imperfections in financial markets, bubbles in asset prices, and the information on which firm managers and central banks base their decisions.Investment; Asset Prices; Inflation Targeting; Fundamentals.

Equitity prices and Monetary Policy: An Overview with an Exploratory Model

Financial stability, with an emphasis on the relevance of asset prices stability to the stability of the overall economy, has become the sub ject of wide discussion among monetary authorities. Closely related to these issues are the concerns of central bankers with a bubble economy and its aftermath. After briefly surveying the potential links between financial markets and the real economy and its implications for the design of monetary policy, we illustrate some of the issues in this literature through the analysis of a simple linear rational expectations model. From this exercise we conclude that the benefits of reacting to asset prices depend crucially on the kind of shock hitting the economy. Ideally, reacting to the misalignment of equity prices is desirable. However, the presence of uncertainty in the estimation of the variables to which the policy rule responds may overturn this conclusion.Asset Prices, Inflation Targeting, Taylor Rule, Rational Expectations, Uncertainty.

The Consumption-Wealth Ratio Under Asymmetric Adjustment

This paper argues that nonlinear adjustment may provide a better explanation of fluctuations in the consumption-wealth ratio. The nonlinearity is captured by a Markov-switching vector error-correction model that allows the dynamics of the relationship to differ across regimes. Estimation of the system suggests that these states are related to the behaviour of financial markets. In fact, estimation of the system suggests that short-term deviations in the consumption-wealth ratio will forecast either asset returns or consumption growth: the first when changes in wealth are transitory; the second when changes in wealth are permanent. Our approach uncovers a richer and more complex dynamics in the consumption-wealth ratio than previous results in the literature, whilst being in accordance with theoretical predictions of a simple model of consumption under uncertainty.Consumption, Financial markets, Uncertainty, Forecast, Markov switching

Taylor-type rules versus optimal policy in a Markov-switching economy¤

We analyse the e®ect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modelled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of ¯nancial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.Asset Prices, Monetary Policy, Markov Switching.

Taylor-type rules versus optimal policy in a Markov-switching economy

We analyse the effect of uncertainty concerning the state and the nature of asset price movements on the optimal monetary policy response. Uncertainty is modeled by adding Markov-switching shocks to a DSGE model with capital accumulation. In our analysis we consider both Taylor-type rules and optimal policy. Taylor rules have been shown to provide a good description of US monetary policy. Deviations from its implied interest rates have been associated with risks of financial disruptions. Whereas interest rates in Taylor-type rules respond to a small subset of information, optimal policy considers all state variables and shocks. Our results suggest that, when a bubble bursts, the Taylor rule fails to achieve a soft landing, contrary to the optimal policy.Asset Prices, Monetary Policy, Markov Switching

Optimal monetary policy with a regime-switching exchange rate in a forward-looking model

We evaluate the macroeconomic performance of different monetary policy rules when there is exchange rate uncertainty. We do this in the context of a non-linear rational expectations model. The exchange rate is allowed to deviate from its fundamental value and the persistence of the deviation is modeled as a Markov switching process. Our results suggest that taking into account the switching nature of the economy is important only in extreme cases.Exchange Rates, Monetary Policy, Markov Switching.

On the Stability of the Wealth Effect

Evidence of instability of the wealth effect in the USA is presented through the estimation of a Markov switching model of the long-run aggregate consumption function. The dating of the regimes appears to bear relation to movements in asset prices. A model-based explanation of the findings is suggested, highlighting the importance of the short-run relation between consumption, income and wealth in explaining the estimated long-run coefficients.Parameter instability, Markov switching, Consumption, Wealth effect.

On the Stability of the Wealth Effect

Evidence of instability of the wealth effect in the USA is presented through the estimation of a Markov switching model of the long-run aggregate consumption function. The dating of the regimes appears to bear relation to movements in asset prices. A model-based explanation of the findings is suggested, highlighting the importance of the short-run relation between consumption, income and wealth in explaining the estimated long-run coefficients.Parameter instability; Markov switching; Consumption; Wealth effect

A Machine Learning Approach

Mutemi, A., Bação, F. (2023). The Discriminants of Long and Short Duration Failures in Fulfillment Sortation Equipment: A Machine Learning Approach. Journal of Engineering, 2023. https://doi.org/10.1155/2023/8557487Due to the difficulties inherent in diagnostics and prognostics, maintaining machine health remains a substantial issue in industrial production. Current approaches rely substantially on human engagement, making them costly and unsustainable, especially in high-volume industrial complexes like fulfillment centers. The length of time that fulfillment center equipment failures last is particularly important because it affects operational costs dramatically. A machine learning approach for identifying long and short equipment failures is presented using historical equipment failure and fault data. Under a variety of hyperparameter configurations, we test and compare the outcomes of eight different machine learning classification algorithms, seven individual classifiers, and a stacked ensemble. The gradient boosting classifier (GBC) produces state-of-the-art results in this setting, with precision of 0.76, recall of 0.82, and false positive rate (FPR) of 0.002. This model has since been applied successfully to automate the detection of long- and short-term defects, which has improved equipment maintenance schedules and personnel allocation towards fulfillment operations. Since its launch, this system has contributed to saving over $500 million in fulfillment expenses. It has also resulted in a better understanding of the flaws that cause long-term failures, which is now being used to build more sophisticated failure prediction and risk-mitigation systems for fulfillment equipment.publishersversionpublishe

Portugal before and after the European Union: facts on nontradables

The rise of nontradable sectors has been mentioned as one of the causes of low economic growth and external imbalances in the Portuguese economy. In this paper we describe the main trends and jumps in the evolution of nontradable sectors, since the mid-1950s, using four different databases to shed light on different dimensions of this issue. We show that, despite the pattern of the growth of the share of services being similar to that observed in other developed countries, since the early 1990s it has been significantly larger than in most countries. We find that the shift to nontradables in Portugal has been fast and that it occurred essentially at the expense of agriculture in the period 1953-95, and essentially at the expense of industry in the period 1995-2009. In 2009, the share of nontradables in total GVA reached 61%, if we exclude open service sectors, and 74.4%, if we treat all service sectors as nontradable. We also find that more than half of the change towards nontradables since joining the European Union took place in the period 1988-1993. Finally, we show that construction and services facing a strong Government demand were the main drivers of the increasing weight of nontradables in the Portuguese economy since 1986.COMPETE; QREN; FEDER; Fundação para a Ciência e a Tecnologia (FCT