Browsing by Subject "Monetary policy"

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Apertura financiera real, sustitucion monetaria y politica cambiaria en la economia pequeña
(1977-09) Martirena Mantel, Ana Maria
Eficacia de la politica monetaria en una economia inflationaria con tasas de interes reales negativas
(1972-10) Brodersohn, Mario Simon
Essays in macroeconomics
(2024-05) Herriford, Trenton; Mueller, Andreas I., 1979-; Andres Drenik; Brent Bundick; Stefano Eusepi
This dissertation consists of three independent chapters, spanning several subfields within macroeconomics. Chapter 1 explores the connection between workers' search for new jobs and their wage expectations. In standard models, workers' expectations about their future real wages determine how much they search for new jobs. But using a panel survey, I show that predicted job search doubles for individuals who expect nominal-wage cuts—even after controlling for their expected real wages. I then develop a search-and-matching model with on-the-job search. The model's main feature is a dynamic game of search and wage setting between matched workers and firms. Adding behavioral worker preferences to the model reproduces the sharp increase in search when workers expect wage cuts, and this mechanism endogenously generates downward nominal wage rigidity. When I calibrate the model to match workers’ job-search response to expecting wage cuts, I find this behavior can explain 2/3 of observed wage freezes. Chapter 2 examines the macroeconomic effects of data releases. Existing research finds that a macroeconomic indicator's first released/announced estimate has effects independent of the indicator’s actual value. However, I find observations from the Great Inflation drive these results, and this finding is especially pronounced for inflation announcements. Specifically, announcing last quarter’s inflation was one percentage point higher than its actual value increased prices two percent over the subsequent year during the Great Inflation—but had no significant effects in the time after. I show this can theoretically be explained by data releases causing self-fulfilling fluctuations, a possibility predicted by the New Keynesian model when I add to it information frictions and when monetary policy does not sufficiently respond to economic conditions. I then calibrate a quantitative New Keynesian model and find nearly all the price response to inflation announcements can indeed be explained by this self-fulfilling mechanism, as opposed to standard effects implied by imperfect information. Chapter 3, which is joint with Brent Bundick and A. Lee Smith, studies the transmission of Federal Reserve communication to financial markets and the economy using new measures of the term structure of policy rate uncertainty. Movements in the term structure of interest rate uncertainty around Federal Open Market Committee (FOMC) announcements cannot be summarized by a single measure but, instead, are two dimensional. We characterize these two dimensions as the level and slope factors of the term structure of interest rate uncertainty. These two monetary policy uncertainty factors significantly help to explain changes in Treasury yields and forward real interest rates around FOMC announcements, even after accounting for changes in the expected path of policy rates. Moreover, we demonstrate that focusing in just a single dimension of monetary policy uncertainty provides an inaccurate description of how policy uncertainty shapes the transmission of FOMC announcements. Finally, our policy uncertainty factors provide stronger first-stage instruments in a proxy structural vector autoregression setting, which implies more expansionary macroeconomic effects of forward guidance than those estimated only using the expected path of policy rates.
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.
Essays on central bank communication
(2023-04-21) Carneiro Mira Godinho, Frederico; Coibion, Olivier; Bhattarai, Saroj, 1981-; Eusepi, Stefano; Coronado, Julia
This dissertation consists in three chapters addressing the relationship between central bank communication and the transmission of monetary policy to a range of different audiences. In the first chapter, I show that once one incorporates country-specific yields into the identification of monetary factors for the European Central Bank, a new factor arises which plays a quantitatively important role in explaining the end of the sovereign debt crisis and the resulting convergence in economic outcomes across the Euro block. Specifications that exclude this novel factor instead imply that the central bank played little role in ending the crisis. I argue that this new factor reflects ECB communications that respond to certain countries’ conditions beyond their share of Euro area activity, mostly during the crisis period. In the second and third chapters, I address how the complexity in the language used in policy statements affects economic outcomes. More specifically, in the second chapter I look at the textual information in monetary policy announcements to show that complex language reduces the effects of monetary policy shocks on asset prices. Finally, in the third chapter I look at how the general public, a non-specialized audience, reacts to distinct policy statements that only differ in the complexity of the words used, by making use of a novel Randomized Control Trial experiment with new survey data. For this audience, a simpler message is more effective in shaping households’ expectations and enhancing understanding, but it reduces the credibility of the Federal Reserve relative to more complex, and less easily understood, communication.
Essays on exchange rate regimes and international financial crises
(2002) Hernandez-Verme, Paula Lourdes; Smith, Bruce D.; Freeman, Scott
My dissertation examines international monetary arrangements, alternative exchange rate regimes and international financial crises. The first chapter focuses on alternative choices of exchange rate regimes for small open economies subject to financial market frictions. I compare the merits of various inflation stabilization policies implemented in Latin America (particularly Argentina and Perú). The second chapter focuses on financial crises and how they are transmitted under alternative international monetary mechanisms. The third chapter investigates the relative merits of a policy of inflation targeting with floating exchange rates. In the first chapter, I find that under floating exchange rates, the ability to raise domestic inflation above foreign inflation can increase production if credit is rationed. However, there is a limitation on the extent to which inflation can be used to stimulate production: if inflation is increased beyond a threshold level, a reduction in real activity is observed. Under either fixed or floating exchange rate regimes, the consequences of changes in domestic or foreign inflation can differ dramatically, depending on whether or not credit rationing is observed. Finally, instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –coupled with high rates of domestic inflation- increases the scope for indeterminacy and for economic fluctuations. In the second chapter, I find that a common international currency and no legal restrictions on exchange help a financial periphery share reserves with a financial center (which has, relatively, more available reserves), mitigating the output losses due to financial crises. The center has incentives for restrictive rediscounting while the periphery has motives for developing central banking. In the third chapter, I find that under a policy of inflation targeting, steady state equilibria replicate the equilibria under a (free) floating exchange rate regime. The scope for economic fluctuations can be typically reduced by a policy of inflation targeting, when compared to either a (free) floating exchange rate regime or a currency board. However, the potential of this policy to improve on stability and/or on determinacy of dynamic equilibria seems to depend strongly on the probability of repaying loans in the economy.
Essays on information and financial frictions in macroeconomics
(2023-04-20) Rezghi, Abolfazl; Bhattarai, Saroj, 1981-; Coibion, Olivier; Eusepi, Stefano; Afrouzi, Hassan
This dissertation examines how information and financial frictions impact firms' investment decisions and shape the effectiveness of monetary policy. The first chapter studies the response of high and low credit quality firms to expansionary monetary shocks. According to the findings, high credit quality firms respond to an expansionary shock by increasing their investment, inventory, and sales, whereas low credit quality firms experience a decrease in these variables. Moreover, their financing behavior differs, with high credit quality firms raising funds through equity while low credit quality firms are unable to issue equity or debt. To provide a theoretical explanation for these findings, a simple model is constructed with two types of firms: financially constrained firms and unconstrained firms. Financially constrained firms face a trade-off in allocating their limited funds between wage payments and investment, while unconstrained firms have greater financial flexibility. As a result of an expansionary shock, an increase in wages affects constrained firms disproportionately, leading them to cut their investment to cover the additional labor costs. Furthermore, constrained firms, due to their limited collateral, have to reduce their debt, which aligns with the empirical observations. The second chapter examines the interaction between information and financial frictions and its implications for the investment channel of monetary policy. In a model with inattentive firms facing financial frictions, constrained firms are more attentive to monetary policy as they attempt to avoid financial costs, creating a new channel for financial frictions to affect price rigidity. Since the level of price rigidity is one of the determinants of the outcome of the monetary policy, the model suggests that the investment channel of monetary policy hinges on the interaction between financial frictions and rational inattention. The research provides empirical evidence that supports the predictions of the model. Firstly, the study uses firms' expectation surveys and, taking size as a proxy for financial constraint, finds that smaller firms have more precise nowcasts and forecasts of aggregate variables. Additionally, these firms are more willing to pay for professional forecasts. Secondly, the research employs firms' balance sheet data and a proxy for aggregate attentiveness to demonstrate that higher information rigidity leads to a sluggish and dampened aggregate investment response to monetary shocks, as predicted by the model. The third chapter finds that a contractionary monetary shock would increase the number of defaults and the aggregate liability of defaulted firms in the economy. Using a DSGE model with financial intermediaries, I show that a higher rate of default negatively impacts the balance sheets of banks and leads to a decrease in the supply of credit and a rise in the interest rate of loans. This further increases the cost of production, forcing more firms to file for bankruptcy. The study demonstrates that monetary policy can effectively dampen this amplification mechanism by considering the default rate in the policy rule, thereby ensuring a more stable economic environment.
Essays on intermediation, the payments system and monetary policy implementation
(2005) Ghwee, Justen Rene Kok Lye; Kendrick, David A.; Paal, Beatrix
This first essay reconsiders how a central bank might tailor its monetary policy in response to a liquidity shortage problem that arises from payments system design. Short run monetary intervention that completely mitigates liquidity shortage achieves Pareto optimality. However, it is not Pareto improving: by inducing shifts in agents’ portfolio choice, short run monetary policy alters the long term real interest rate, and consequently, the distribution of consumption goods among heterogeneous agents. A regime that pays interest on reserves could attain Pareto improving allocation, but is never Pareto optimal. Under the interest on reserves scheme, the central bank can pursue policy targeting the quantity of reserves balances for liquidity provision purpose independently of policy targeting the interest rate for other broad monetary policy objectives. vi The second essay evaluates the performance of the quadratic linear programming (QLP) method in accounting for a bank’s liquidity management over the ten-day reserves maintenance period (RMP). The QLP method reasonably captures the qualitative features of the bank’s demand for excess reserves. The simulated demand schedule is weakly J-shaped, implying greater demand for reserves as the reserve settlement day approaches. While institutional features account for the cyclical patterns in the earlier days of the RMP, bank’s reserves “locked-in” cost avoidance activity and uncertainty about the size of central bank refinancing rationalize the large surge in the demand for reserves towards the settlement day. However, the QLP method is less successful in emulating the magnitude of the reserves demand dynamics comparable to that observed in the data. The third essay examines the nature of equilibrium credit rationing under different assumptions with regard to investment technologies available to entrepreneurs applying for loans. Lenders ration credit to borrowers with low-risk investment technology in the form of (i) the constrained size of loan allotment, or (ii) the uncertainty in loan granting, but not both. The realized type of rationing depends on how much the borrower perceives the value of not being the recipient of one type of rationing over the other. Different loan market structures also imply different equilibrium loan contracts.
Essays on labor markets, monetary policy, and uncertainty
(2018-04-30) White, Neil Ware, IV; Coibion, Olivier; Bhattarai, Saroj; Glover, Andrew; Petrosky-Nadeau, Nicolas
This dissertation examines the impacts on the labor market of monetary policy and macroeconomic uncertainty. The first chapter examines how monetary policy shocks in the U.S. affect the flows of workers among three labor market categories---employment, unemployment, and non-participation---and assesses each flow's relative importance to changes in labor market "stock'' variables like the unemployment rate. I find that job loss accounts for the largest portion of monetary policy's effect on labor markets. I develop a New Keynesian model that incorporates these channels and show how a central bank can achieve welfare gains from targeting job loss, rather than output, in an otherwise standard Taylor rule. The second chapter examines the role of monetary policy in "job polarization.'' I argue that contractionary monetary policy has accelerated the decline of employment in routine occupations, which largely affected workers with a high-school degree but no college. In part by disproportionately affecting industries with high shares of routine occupations, contractionary monetary policy shocks lead to large and persistent shifts away from routine employment. Expansionary shocks, on the other hand, have little effect on these industries. Indeed, monetary policy's effect on overall employment is concentrated in routine jobs. These results highlight monetary policy's role in generating fluctuations not only in the level of employment, but also the composition of employment across occupations and industries. The third chapter introduces new direct measures of uncertainty derived from the Michigan Survey of Consumers. The series underlying these new measures are more strongly correlated with economic activity than many other series that are the basis for uncertainty proxies. The survey also facilitates comparison with response dispersion or disagreement, a commonly used proxy for uncertainty in the literature. Dispersion measures have low or negative correlation with direct measures of uncertainty and often have causal effects of opposite sign, suggesting that they are poor proxies for uncertainty. For the measures based on series most closely correlated with economic activity, positive uncertainty shocks are mildly expansionary. This result is robust across identification and estimation strategies and is consistent with "growth options'' theories of the effects of uncertainty.
Essays on monetary economics
(2023-04-20) Ma, Chang seok; Coibion, Olivier; Boehm, Christoph; Bhattarai, Saroj; Sialm, Clemens
This dissertation explores the transmission of monetary policy. Chapter 1 highlights the role of firms' liquidity in monetary policy transmitted to innovations. I construct a patent-based measure of innovation using historical patent data. I document several empirical findings. Expansionary monetary shocks increase aggregate total factor productivity (TFP), aggregate innovations measured by the number of patents and their value at the aggregate level. Firm-level data show that firms with higher liquidity contribute to the increase in innovation in response to expansionary monetary policy. Moreover, I provide evidence suggesting that the mechanism underlying such heterogeneity is not because firms with higher liquidity benefit from the appreciation of their patent value but because they can easily access accumulated cash reserves to finance their investment. To explain empirical findings, I develop a model of firms with cash-in-advance constraints, which predicts that firms with higher liquidity are most responsive to expansionary monetary policy shock while those with lower liquidity face binding constraints for innovation. Chapter 2 highlights the role of early refinancing as an investment channel for the transmission of monetary policy on the firm side. Based on the Mergent Fixed Income Securities Database, I conduct two regression analyses. First, I document heterogeneous early refinancing responses to monetary policy shock. I find that firms with good financial health measured by (i) a low leverage ratio and (ii) good credit ratings are more likely to conduct early refinancing. Second, I show that given monetary policy shock, early refinancing stimulates investment. My findings suggest that we should consider the early refinancing channel for the transmission of monetary policy shock. These empirical findings face endogeneity issues which are left as a topic for future research. Chapter 3 examines the transmission of monetary policy to consumption with demographic changes taken into account. Especially, this paper focuses on the labor market to clarify the mechanism underlying heterogeneous consumption response by age. Using Consumer Expenditure Surveys (CEX), I show that older households respond more to expansionary monetary policy shocks compared to young- and middle-aged households. I further provide evidence using their labor market outcomes. This suggests that the labor income of older households increase more than others and this was driven by an increase in their hourly wage rather than an increase in working hours.
Oferta monetaria y cambios en la estructura de precios internos en una economia abierta : el aporte del Dr. Cantillon
(1980-04) Villanueva, Javier
Politica cambiaria optima en la economia pequeña
(1980-12) Mantel, Rolf Ricardo; Martirena Mantel, Ana Maria
Politica del tipo de cambio en una economia pequeña: el crawling peg activo
(1980-11) Mantel, Rolf Ricardo; Martirena Mantel, Ana Maria
Some unexpected consequences of financial frictions
(2020-04-26) Howes, Cooper Andersen; Coibion, Olivier; Bhattarai, Saroj; Şahin, Ayşegül; Gorodnichenko, Yuriy
This dissertation examines the role of financial frictions, monetary policy, and fiscal policy in determining aggregate economic outcomes. The first chapter examines the role of credit reallocation in explaining the fact that the structural decline in US manufacturing over the past several decades has occurred disproportionately during recessions. Using syndicated loan-level data from DealScan, I document that manufacturing firms with open revolving credit lines involving Lehman Brothers at the time of its collapse in 2008 were persistently less likely to receive new loans and experienced reduced sales and employment after the crisis. As financial markets recovered, new credit was reallocated via the extensive margin to firms in higher-value industries such as software and healthcare services. A model with technology-driven structural change and fixed costs of establishing new financial relationships can match these facts and suggests the opportunity cost of providing credit to dying industries during times of crisis can be significant. The second chapter studies how financial frictions impact the transmission of monetary policy to investment. I show that while investment in most sectors declines in response to a contractionary monetary policy shock, investment in the manufacturing sector increases. Using manually digitized aggregate income and balance sheet data for the universe of US manufacturing firms, I document that this increase is driven by the types of firms which are least likely to be financially constrained. A two-sector New Keynesian model with financial frictions can match these facts; unconstrained firms are able to take advantage of the decline in the user cost of capital caused by the monetary contraction while constrained firms are forced to cut back. The third chapter analyzes how different types of tax changes can have different economic impacts. Using Congressional records, I decompose the plausibly exogenous legislative tax provisions into one of five categories: business marginal rate provisions, business investment incentives, other business provisions, individual marginal rate provisions, and other individual provisions. I find that the effects differ crucially depending on which types of taxes are being cut and that the most stimulative effects come from marginal rates for both individuals and businesses and investment incentives. This suggests that substitution effects, rather than income or demand-driven effects, are the primary driver of tax multipliers.
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.
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.
Understanding and profiting from the recession of 2007-2009
(2009-12) Frisch, Andrew Harman; Duvic, Robert Conrad, 1947-; Ambler, Tony
“The charm of history and its enigmatic lesson consist in the fact that, from age to age, nothing changes and yet everything is completely different.” – Aldous Huxley Aldous Huxley perfectly captures the elusive nature of how difficult it is to analyze history to gain insight to the present and future. Especially because the recent exponential growth in information and technology seem to be changing how the world operates. In actuality though, the same patterns continue to reappear. This paper strives to look back and first understand on a macroeconomic level what causes the business cycle of expansion and recession. Particularly, what historically triggers recessions and what are the consequences of those recessions? Using this historical knowledge, this paper will leave the reader with a better understanding of how a company can grow and thrive in the current difficult economic climate. Even though the expansion/recession cycle is still prevalent today, the affects of these swings during the 1980’s and 1990’s were dramatically reduced in what historians call “The Great Moderation”. The potential reasons for this moderation will be examined and their validity evaluated. This historical perspective combined with an understanding of more recent events allows for this paper to create recommendations for companies to help navigate the stormy economic waters ahead as we try to recover from the current recession. These recommendations hinge on policy advisors and politicians heeding the advice of the past. Lastly, I will explore potential alternate outcomes given poor fiscal and legislative policy by the ruling elite.