Browsing by Subject "Federal Reserve"

Now showing 1 - 6 of 6

Academics in Government: Federal Reserve and US Treasury
(Salem Center, 2021-01-16) Bauguess, Scott; Berner, Richard; Guyton, John; Santos, Joao; Schreft, Stacey; Van den Heuvel, Skander
Essays in macroeconomics and finance
(2022-04-14) Kroner, Tom Niklas; Coibion, Olivier; Boehm, Christoph; Bhattarai, Saroj; Neuhann, Daniel
My dissertation consists of three independent chapters focusing on empirical questions in macroeconomics and finance. In Chapter 1, I study the role of firms’ uncertainty in the transmission of forward guidance to investment. To do so, I employ a quarterly firm-level panel of U.S. publicly traded firms. I measure forward guidance shocks based on unexpected changes in the slope of the yield curve in a 30-minute window around Federal Reserve announcements. I show that firms which are more uncertain adjust their investment as if they are more pessimistic. More uncertain firms adjust their investment relatively more downward for expected monetary tightenings and relatively less upward for expected loosenings. To explain my empirical findings, I construct a New Keynesian model with a high-uncertainty and a low-uncertainty sector. Agents in the high-uncertainty sector are ambiguous (Knightian uncertain) about the informativeness of forward guidance, and choose to take a pessimistic stance due to their ambiguity aversion. The model implies that expansionary forward guidance is less powerful in recessions due to a larger share of uncertain agents. In Chapter 2, joint with Christoph Boehm, we provide evidence for a causal link between the US economy and the global financial cycle. Using a unique intraday dataset, we show that US macroeconomic news releases have large and significant effects on global risky asset prices. Stock price indexes of 27 countries, the VIX, and commodity prices all jump instantaneously upon news releases. The responses of stock indexes co-move across countries and are large—often comparable in size to the response of the S&P 500. Further, US macroeconomic news frequently explains more than 15% of the quarterly variation in foreign stock markets. The joint behavior of stock prices and long-term bond yields suggests that systematic US monetary policy reactions to news do not drive the estimated effects. Instead, the evidence is consistent with a direct effect on investors’ risk-taking capacity. Our findings show that a byproduct of the United States’ central position in the global financial system is that news about its business cycle has large effects on global financial conditions. In Chapter 3, joint with Christoph Boehm, we are trying to better understand how FOMC announcements affect the stock market. A large literature uses high-frequency changes in interest rates around FOMC announcements to study monetary policy. These yield changes have puzzlingly low explanatory power for the stock market—even in a narrow 30-minute window. We propose a new approach to test whether the unexplained variation represents monetary policy news or just noise. In particular, we allow for a latent “Fed non-yield curve shock”, which we estimate via a heteroskedasticity-based procedure. Using a test for weak identification, we show that our shock is well identified, that is, the unexplained variation is not just noise. We then go on to show that the shock, signed to increase stock prices, leads to sizable declines in the equity and variance premium, an increase in the 10-year term premium, an increase in short-run inflation expectations, as well as a dollar depreciation against multiple non-safe-haven currencies. Hence, the evidence supports the interpretation that the shock affects risk-appetite and leads to a reverse “flight-to-safety” effect. Lastly, using a method from the computational linguistics literature, we show that our shock can be linked to specific topics discussed in FOMC statements, suggesting that it reflects written communication by the Federal Reserve.
Ken Judd: When Will the Fed Join the Third Millennium?
(Salem Center, 2020-10-07) Judd, Ken
Statistical problem with measuring monetary policy with application to the current crisis
(2010-05) Pappoe, Naakorkoi; Auerbach, Robert D.; Stolp, Chandler
This report reviews the 2007 financial crisis and the actions of the Federal Reserve. The Full Employment Act of 1946 and the "Humphrey-Hawkins" Act guides the Fed's actions. These two laws outline the long-term goals of the monetary policy framework the Fed uses; however, the framework lacks principles for achieving the mandated long term goals such as reliable, complete data. This report looks at the use of model-based forecasting and gives recommendations for principles which will strengthen the preexisting monetary framework.
A TALE OF TWO CENTRAL BANKS: The Importance of Limiting Political Interference with Central Bank Independence
(2023-05) Cozby, Sarah Gleith
Both theory and empirical evidence support the idea that more independent central banks have better economic outcomes. The purpose of this paper, presented in two cases, is to examine attempts to interfere with central bank independence and their impact on inflation, currency valuation, and macroeconomic performance by evaluating the policies of Turkey President Tayyip Erdogan and US President Donald Trump. Both Presidents used rhetoric and power over the appointment of officials to attempt to compromise central bank independence. President Erdogan’s success directly led to economic crises, including severe currency devaluation and hyperinflation. The Senate approval process prevented Trump from appointing loyalists to the Federal Reserve Board, and the economy prospered. However, his rhetoric arguably damaged the bank’s credibility and public perception of its independence. Close analysis and comparison of the two cases and their outcomes, particularly the effects on citizens, highlights the continued importance of protecting the central bank’s ability to make decisions free from short-term political influence.
The Federal Reserve's monetary policy effect on financial markets and investors
(2017-05-08) Owens, John Richard III; Galbraith, James K.; Brown, Keith
This paper explores the short and long-term effects of the Federal Reserve’s post-recession monetary policy. Since 2009, in the wake of the Great Recession, the Federal Reserve took unprecedented action by lowering the federal funds rate to zero. This zero-interest rate policy persisted until late 2015, when the Federal Reserve increased rates for the first time in 7 years. While rates have increased slightly, the economy continues to operate in a low interest rate environment. By keeping the federal funds rate near zero for such an extended period of time, the Federal Reserve precipitated significant effects on the economy and investors. This paper analyzes the short-term, intermediate, and long-term effects of the Federal Reserve’s post-recession monetary policy on the financial markets and institutional investors; specifically, we examine the fed funds rate effect on the economy, equity markets, interest rates, private equity industry, and investor portfolios.