Measuring the effectiveness of US monetary policy during the COVID‐19 recession

Abstract

The COVID‐19 recession that started in March 2020 led to an unprecedented decline in economic activity across the globe. To fight this recession, policy makers in central banks engaged in expansionary monetary policy. This paper asks whether the measures adopted by the US Federal Reserve (Fed) have been effective in boosting real activity and calming financial markets. To measure these effects at high frequencies, we propose a novel mixed frequency vector autoregressive (MF‐VAR) model. This model allows us to combine weekly and monthly information within a unified framework. Our model combines a set of macroeconomic aggregates such as industrial production, unemployment rates, and inflation with high‐frequency information from financial markets such as stock prices, interest rate spreads, and weekly information on the Fed's balance sheet size. The latter set of high‐frequency time series is used to dynamically interpolate the monthly time series to obtain weekly macroeconomic measures. We use this setup to simulate counterfactuals in absence of monetary stimulus. The results show that the monetary expansion caused higher output growth and stock market returns, more favorable long‐term financing conditions and a depreciation of the US dollar compared with a no‐policy benchmark scenario.

The Impact of COVID-19 Pandemic on Stock Market: Evidence from Romania

“…Our results are in line with the other results reported by other studies. On the one hand, we found a negative influence of the pandemic variables (e.g., [4][5][6][7]) and of the restrictions related to movement (e.g., [8][9][10]) on the Romanian stock market, and, on the other hand, we found positive influence of the monetary policy interest rate on the Romanian stock market (e.g., [18,19]).…”

“…In addition to the movement restrictions, many central banks adopted expansionary monetary measures to stimulate the economy through interest rate adjustments [8,18,19]. The current monetary policy of the main central banks (e.g., European Central Bank, Federal Reserve) is quite expansionary as they are purchasing a significant part of the public debt issued by their national governments.…”

“…In most countries, the level of monetary policy interest rate gradually decreased by different percentage points (e.g., less than 1 pp in Russia and Israel; 1 pp in the Czech Republic and Poland; more than 1 pp in Romania, Ukraine, Egypt, Ghana, and South Africa). In case of the United States, Feldkircher et al [19] showed that the Federal Reserve was successful in stimulating growth and its monetary policy triggered a depreciation of the USA dollar that supported the external competitiveness of the USA economy.…”

Drivers of the Cash Paradox

“…Two parallel processes took place during this period. First, the switch by the central banks to an ultra-loose monetary policy involving the reduction of the central banks' interest rates close to zero, as well as unconventional measures, especially in providing additional liquidity to the economy (Joyce et al 2012;Feldkircher et al 2021;Kisel'akova et al 2020;Papadamou et al 2020). Second, the interest rate policy of central banks coincided with the ongoing downward trend in long-term interest rates and the equilibrium interest rate.…”

On the economic impacts of COVID‐19: A text mining literature analysis

“…Emphasis on currencies is given by Ciner ( 2021 ) and Narayan, Devpura, and Wang ( 2020 ), and cryptocurrencies are also mentioned by Chiu, Hung, and Liang ( 2020 ) and Corbet, Hou, Hu, Larkin, and Oxley ( 2020 ). On the role of monetary policies, their effectiveness is analyzed through monetary stimulus (Feldkircher, Huber, & Pfarrhofer, 2021 ), also focusing specifically on quantitative easing (Rebucci, Hartley, & Jiménez, 2020 ; Zhang, Hu, & Ji, 2020 ; Bhar & Malliaris, 2021 ) and helicopter money (Chakraborty & Thomas, 2020 ; Drescher, Fessler, & Lindner, 2020 ). The importance of funding economies, through credit provision and liquidity access on markets, is also underlined by various authors.…”