Unconventional monetary policy reaction functions: evidence from the US

Abstract

We specify unconventional monetary policy reaction functions for the Fed using linear and nonlinear econometric frameworks. We find that nonstandard policy measures are largely driven by the dynamics of inflation and the output gap, with the effect being particularly strong during QE rounds. Moreover, we uncover the presence of asymmetry and regime dependence in central bank’s actions since the global financial crisis, especially concerning the response of the term spread and the shadow short rate to the growth rate of central bank reserves. From a policy perspective and given the lack of a systematic response of monetary policy to asset price growth in nonstandard times, our findings seem to corroborate the view that concerns about asset price bubbles, financial sector pro-cyclicality and systemic risk should be part of the macro-prudential policy toolkit.

Conventional and unconventional monetary policy reaction to uncertainty in advanced economies: evidence from quantile regressions

“…They show that such shocks do not have a substantial impact on industrial production or consumer prices, but are responsible for a strong boost to asset prices, which is larger in magnitude for stock prices than for housing prices. 6 In this regard note that, more recently, Agnello et al (2018) specify unconventional monetary policy reaction functions for the Fed using a Markov-Switching Regression (MSR) and a Time-Varying Probability Markovian Process (TVPMS), which in turn can also be considered as an alternative approach to quantile regressions in modelling nonlinear Taylor-type rules. 7 A number of authors estimate a monetary rule with interest rate smoothing.…”

International Monetary Policy and Cryptocurrency Markets: Dynamic and Spillover Effects

“…In the aftermath of the global financial crisis, central banks in both developed countries and emerging market economies have deployed a series of unconventional monetary policies (Jawadi et al, 2017;Agnello et al, 2019), whereby the expansion of the monetary authority's own balance sheet is used to support economic activity and promote higher inflation (Blinder, 2000;Bernanke and Reinhart, 2004). These large-scale national policies were quickly transmitted across jurisdictions and a surge in liquidity was globally witnessed (Chen et al, 2016;Tillmann, 2016).…”

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“…However, large-scale asset purchases by the central bank seem to signal further purchases in the future. Asset prices do not significantly impact unconventional monetary policy measures (Agnello, Castro, Dufrénot, Jawadi, and Sousa 2019).…”