NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Unconventional Monetary Policy

June 20-21, 2014
Kosuke Aoki, Takatoshi Ito, and Tsutomu Watanabe, University of Tokyo, and Andrew Rose, University of California, Berkeley, Organizers

Takatoshi Ito

We Are All QE-sians Now

The four major banks, Bank of Japan (BOJ), the Federal Reserve (FRB), the Bank of England (BOE), and European Central Bank (ECB), have adopted unconventional monetary policy, or broadly-defined quantitative easing (QE), in the last several years. The broadly-defined QE can be classified into comprehensive easing (CE) and pure QE. The former is aimed at purchasing assets of dysfunctional markets and the latter is aimed at expanding the monetary base to stimulate demand. Ito's objective in this paper is two-fold. First, the various QEs adopted by the four central banks are classified as CE or pure QE. Special attention is paid to the BOJ's quantitative easing in the earlier period, 2001-6. Second, effects of the BOJ's QE measures are empirically investigated with a focus on the three possible transmission channels with monthly data since January 1999. The long-term interest rate tends to be lower and the yield curve tends to be flattened when the monetary base expands faster than nominal GDP. The yen vis-à-vis the U.S. dollar tends to depreciate when the Japanese monetary base expands faster than the U.S. monetary base. An impact of monetary base expansion on the inflation expectation is not confirmed. The findings are consistent with a view that QE is effective by lowering the long-term interest rate and the currency depreciation.


Lars Svensson, Stockholm School of Economics and NBER

Inflation Targeting and Leaning Against the Wind: A Case Study

Should inflation targeting involve some leaning against the wind? Svensson explains how Sweden provides a case study, since the Riksbank has been leaning against the wind since 2010, stating concerns about risks associated with household indebtedness. The cost of this policy in terms of low inflation and high unemployment is high. According to the Riksbank's own analysis, the policy rate effect on household indebtedness is very small, and any effect on risks associated with household debt is miniscule. Indeed, much lower inflation than expected has increased households' debt burden and, if anything, increased such risks.


Adair Morse and Annette Vissing-Jorgensen, University of California, Berkeley and NBER, and Anna Cieslak, Northwestern University

Stock Returns over the FOMC Cycle

Cieslak, Morse, and Vissing-Jorgensen document that since 1994, the U.S. equity premium follows an alternating weekly pattern measured in Federal Open Market Committee (FOMC) cycle time, that is, in time since the last FOMC meeting. The equity premium is earned entirely in weeks 0, 2, 4, and 6 in FOMC cycle time (with week 0 starting the day before a scheduled FOMC announcement day). The authors show that this pattern is likely to reflect a risk premium for news (about monetary policy or the macroeconomy) coming from the Federal Reserve: 1, the FOMC calendar is quite irregular and changes across sub-periods over which the authors' finding is robust; 2, even weeks in FOMC cycle time do not line up with other macro releases; 3, volatility in the fed funds futures market and the federal funds market (but not to the same extent in other markets) peaks during event weeks in FOMC cycle time; 4, information processing/decision making within the Fed tends to happen biweekly in FOMC cycle time: before 1994, when changes to the Fed funds target between meetings were common, they disproportionately took place during even weeks in FOMC cycle time. In addition, after 2001 Board of Governors discount rate meetings (at which the board aggregates policy requests from regional Federal Reserve banks and receives staff briefings) tended to take place biweekly in FOMC cycle time. As for how the information gets from the Federal Reserve to the market, the authors rule out the Federal Reserve signaling policy via open market operations post-1994 and the high return weeks do not systematically line up with official information releases from the Federal Reserve or with the frequency of speeches by Fed officials. The authors end with a discussion of quiet policy communications and unintended information flows.


John Fernald, Mark Spiegel, and Eric Swanson, Federal Reserve Bank of San Francisco

Monetary Policy Effectiveness in China: Evidence from a FAVAR Model

Fernald, Spiegel, and Swanson use a broad set of Chinese economic indicators and a dynamic factor model framework to estimate Chinese economic activity and inflation as latent variables. They incorporate these latent variables into a factor-augmented vector autoregression (FAVAR) to estimate the effects of Chinese monetary policy on the Chinese economy. A FAVAR approach is particularly well-suited to this analysis because of concerns about Chinese data quality, a lack of a long history for many series, and the rapid institutional and structural changes that China has undergone. The authors find that increases in bank reserve requirements reduce economic activity and inflation, consistent with previous studies. However, in contrast to much of the literature, they find that changes in Chinese interest rates also have substantial impacts on economic activity and inflation while other measures of changes in credit conditions such as shocks to M2 or lending levels do not, once other policy variables are taken into account. Overall, the authors' results indicate that the monetary policy transmission channels in China have moved closer to those of Western market economies.


Randall Morck,University of Alberta and NBER; Deniz Yavuz, Purdue University; and Bernard Yeung, National University of Singapore

State-Controlled Banks and the Effectiveness of Monetary Policy

Monetary policy correlates more significantly with lending by state-controlled banks than by private-sector banks. At the country level, monetary policy is more significantly related to credit and fixed capital formation growth where a larger fraction of the banking system is state-controlled. State-owned enterprise (SOE) banks may thus strengthen monetary policy levers. Morck, Yavuz, and Yeung hypothesize that SOE bank managers are more responsive to political pressure and thus more cooperative with monetary policy. Reverse causality scenarios and alternative explanations are rendered implausible by the bank-level results and by tests exploiting bank privatizations, election years, economic cycles, and cross-country variation in measures of civil servants' effectiveness and sensitivity to political pressure.


Chung-Shu Wu and Chun-Neng Peng, Chung-Hua Institution for Economic Research; Jin-Lung Lin, National Dong-Hwa University; and Hsiang-Yu Chin, National Chengchi University

Capital Flows and Unconventional Monetary Policy

During late 2008, Taiwan was experiencing negative economic growth as a result of the global financial crisis, and yet the money supply during the same period grew substantially. A close look at the international financial account reveals a huge amount of capital inflows as investors withdrew their funds from troubled international financial markets. In addition, the Central Bank of China, Taiwan did not take measures to completely sterilize the capital inflows. This can be viewed as an unconventional monetary measure for quantitative easing, that is, increasing liquidity by not sterilizing capital inflows. Following this thought, Wu, Lin, Peng, and Chin investigate the impact of capital flows on money demand. Empirical analysis using Taiwanese data confirms the conjecture that capital flows provide an additional channel to affect money demand.

Leo Krippner, Reserve Bank of New Zealand and CAMA

Measuring the Stance of Monetary Policy in Conventional and Unconventional Environments

Krippner introduces an idea for summarizing the stance of monetary policy with quantities derived from a class of yield curve models that respect the zero lower bound constraint for interest rates. The "effective monetary stimulus" aggregates the current and estimated expected path of interest rates relative to the neutral interest rate from the yield curve model. Unlike shadow short rates, effective monetary stimulus measures are consistent and comparable across conventional and unconventional monetary policy environments, and are less subject to variation with modeling choices as the author demonstrates with two- and three-factor models estimated with different data sets. Full empirical testing of the interrelationships between effective monetary stimulus measures and macroeconomic data remains a topic for future work.


Byongju Lee, Woon Gyu Choi, Taesu Kang, and Geun-Young Kim, Bank of Korea

U.S. Monetary Policy Normalization and EME Policy Mix from a Global Liquidity Perspective

The U.S. Federal Reserve normalizes its monetary policy in a multi-stage process. Choi, Lee, Kang, and Kim attempt to assess the impact of the process on emerging market economies (EMEs). A one-percentage-point increase in the Fed's policy rate is found to reduce the output growth rate of EMEs by 0.35 percent on average by the end of first year, and the resulting output loss is more severe to a fragile group of EMEs. Fragile EMEs are prone to experiencing sharper currency depreciations compared to resilient EMEs. Sharper depreciations exert upward pressure on domestic inflation and, along with higher policy rates to mitigate the reversal in capital flows, reduce further domestic demand. The mix of two policy tools for EMEs, their policy rates and foreign reserves, is found to be conducive to macroeconomic and financial stability objectives. The authors' finding also suggests that, in the face of quantitative easing tapering, effective policy mixes to stabilize both real and financial fronts could be different depending on whether the respective countries are fragile or resilient EMEs.


Manuel Bertoloto, PriceStats, and Alberto Cavallo and Roberto Rigobon, MIT and NBER

Using Online Prices to Anticipate Official CPI Inflation


Kota Watanabe, Meiji University, and Tsutomu Watanabe

Estimating Daily Inflation Using Scanner Data: A Progress Report

Watanabe and Watanabe construct a Törnqvist daily price index using Japanese point-of-sale (POS) scanner data from 1988 to 2013. First, they find that the POS-based inflation rate tends to be about 0.5 percentage points lower than the consumer price index (CPI) inflation rate, although the difference between the two varies over time. Second, the difference between the two measures is greatest from 1992 to 1994 when, after the bubble economy burst in 1991, the POS inflation rate dropped rapidly and turned negative in June 1992 while the CPI inflation rate remained positive until the summer of 1994. Third, the standard deviation of daily POS inflation is 1.1 percent compared to a standard deviation for the monthly change in the CPI of 0.2 percent, indicating that daily POS inflation is much more volatile, mainly because of frequent switching between regular and sale prices. The authors show that the volatility in daily inflation can be reduced by more than 20 percent by trimming the tails of product-level price change distributions. Finally, if the authors measure price changes from one day to the next and construct a chained Törnqvist index, a strong chain drift arises so that the chained price index falls to .110 of the base value over the 25-year sample period, which is equivalent to an annual deflation rate of 60 percent. The authors provide evidence suggesting that one source of the chain drift is fluctuations in sales quantity before, during, and after a sale period.


Ippei Fujiwara, Australian National University; Yoshiyuki Nakazono, Yokohama City University; and Kozo Ueda, Waseda University

Policy Regime Change against Chronic Deflation? Policy Option under a Long-Term Liquidity Trap

The policy package known as Abenomics appears to have influenced the Japanese economy drastically, in particular in the financial markets. In this paper, focusing on the aggressive monetary easing of Abenomics, the first arrow, Fujiwara, Nakazono, and Ueda evaluate its role in guiding public perceptions of monetary policy stance through the management of expectations. In order to end chronic deflation, such as that affecting Japan over the last two decades, policy regime change must be perceived by economic agents. Analysis using the QUICK survey system (QSS) monthly survey data shows that monetary policy reaction to inflation rates has been in a declining trend since the mid 2000s, implying intensified forward guidance well before Abenomics. However, Japan seems to have moved closer to a long-term liquidity trap where even long-term bond yields are constrained by the zero lower bound. Consequently, no sizable difference in perceptions has been found before or after the introduction of Abenomics. Estimated changes in perceptions are not abrupt enough to satisfy "Sargent's (1982) criteria for regime change" termed by Eggertsson (2008). This poses a serious challenge to central banks: what is an effective policy option under the long-term liquidity trap?


Gu Jin and Tao Zhu, Hong Kong University of Science and Technology

Non Neutrality of Money in Dispersion: Hume Revisited

Jin and Zhu seek to explore non-neutrality of money in the dispersion of the transition process following an unanticipated money injection. They examine the responses of the output and nominal price to shocks. They show that a certain class of money injection schemes will induce quantitatively significant and persistent responses in output, sluggish price adjustment, and a short-run negatively-sloped Phillips curve. The short-run tradeoff between output and inflation is not exploitable in the long run.


 
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