Time-Varying Volatility, Financial Intermediation and Monetary Policy

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. We document that expansionary monetary policy shocks are less effective at stimulating output and investment in periods of high volatility compared to periods of low volatility, using a regime-switching vector autoregression. Exogenous policy changes are identified by adapting an external instruments approach to the non-linear model. The lower effectiveness of monetary policy can be linked to weaker responses of credit costs, suggesting a financial accelerator mechanism that is weaker in high volatility periods. To rationalize our robust empirical results, we use a macroeconomic model in which financial intermediaries endogenously choose their capital structure. In the model, the leverage choice of banks depends on the volatility of aggregate shocks. In low volatility periods, financial intermediaries lever up, which makes their balance sheets more sensitive to aggregate shocks and the financial accelerator more effective. On the contrary, in high volatility periods, banks decrease leverage, which renders the financial accelerator less effective; this in turn decreases the ability of monetary policy to improve funding conditions and credit supply, and thereby to stimulate the economy. Hence, we provide a novel explanation for the non-linear effects of monetary stimuli observed in the data, linking the effectiveness of monetary policy to the procyclicality of leverage. Terms of use: Documents in

Disagreement and Monetary Policy

“…Such a pattern cannot be observed in the low-uncertainty regime. Our estimated state-dependent responses in periods of high and low uncertainty or stock market volatility are in line with the results of previous studies, which show that the effect of monetary policy shocks are muted in times of high aggregate volatility, among these Aastveit, Natvik, and Sola (2013); Pellegrino (2017); Caggiano, Castelnuovo, and Nodari (2017); Eickmeier et al (2016). Therefore, using uncertainty measures instead of disagreement in the regime-switching estimation do not appear to be suitable proxies.…”

A Markov Switching Factor‐Augmented VAR Model for Analyzing US Business Cycles and Monetary Policy

“…The monetary policy shock is identified by means of standard sign restrictions in the spirit of Uhlig () that allow for simultaneous relations between monetary policy and financial market quantities. Our findings, corroborating recent empirical evidence provided in Eickmeier, Metiu and Prieto (), suggest that the impact of monetary policy on financial markets is more pronounced during expansions than recessions. This result, however, does not carry over to variables representing the real side of the economy.…”

“…Second, panel (b) provides evidence that the impact of monetary policy on the probability of getting out of a recession is rather limited, corroborating the findings provided in Eickmeier et al . () who argue that if uncertainty increases, the balance sheet transmission mechanism becomes less effective since banks decrease leverage ratios, effectively limiting the ability of the central bank to influence funding conditions.…”

Financial Shocks and Inflation Dynamics

“…27 This finding is consistent with Eickmeier et al (2016) Nakamura and Steinsson (2015). 27 The Federal Reserve acted as a provider of liquidity to encounter the disruption of normal channels of borrowing and payments after the terrorist attacks of September 11, 2011 (Meyer volatility periods.…”