Financial crisis and quantitative easing: can broad money tell us anything?

When Bank of England (and the Federal Reserve Board) introduced their quantitative easing (QE) operations they emphasised the effects on money and credit, but much of their empirical research on the effects of QE focuses on long-term interest rates. We use a flow of funds matrix with an independent central bank to show the implications of QE and other monetary developments, and argue that the financial crisis, the fiscal expansion and QE are likely to have constituted major exogenous shocks to money and credit in the UK which could not be digested immediately by the usual adjustment mechanisms. We present regressions of a reduced form model which considers the growth of nominal spending as determined by the growth of nominal money and other variables. These results suggest that money was not important during the Great Moderation but has had a much larger role in the period of the crisis and QE. We then use these estimates to illustrate the effects of the financial crisis and QE. We conclude that it would be useful to incorporate money and/or credit in wider macroeconometric models of the UK economy.

Time Variation in the Dynamics of Worker Flows: Evidence from the US and Canada

VAR methods have been used to model the inter-relationships between inflows and outfl ows into unemployment and vacancies using tools such as impulse response analysis. In order to investigate whether such impulse responses change over the course of the business cycle or or over time, this paper uses TVP-VARs for US and Canadian data. For the US, we find interesting differences between the most recent recession and earlier recessions and expansions. In particular, we find the immediate effect of a negative shock on both in ow and out flow hazards to be larger in 2008 than in earlier times. Furthermore, the effect of this shock takes longer to decay. For Canada, we fi nd less evidence of time-variation in impulse responses.

How Optimal is US Monetary Policy?

Most of the literature estimating DSGE models for monetary policy analysis assume that policy follows a simple rule. In this paper we allow policy to be described by various forms of optimal policy - commitment, discretion and quasi-commitment. We find that, even after allowing for Markov switching in shock variances, the inflation target and/or rule parameters, the data preferred description of policy is that the US Fed operates under discretion with a marked increase in conservatism after the 1970s. Parameter estimates are similar to those obtained under simple rules, except that the degree of habits is significantly lower and the prevalence of cost-push shocks greater. Moreover, we find that the greatest welfare gains from the ‘Great Moderation’ arose from the reduction in the variances in shocks hitting the economy, rather than increased inflation aversion. However, much of the high inflation of the 1970s could have been avoided had policy makers been able to commit, even without adopting stronger anti-inflation objectives. More recently the Fed appears to have temporarily relaxed policy following the 1987 stock market crash, and has lost, without regaining, its post-Volcker conservatism following the bursting of the dot-com bubble in 2000.

US Monetary and Fiscal Policies - Conflict or Cooperation?

Most of the literature estimating DSGE models for monetary policy analysis ignores fiscal policy and assumes that monetary policy follows a simple rule. In this paper we allow both fiscal and monetary policy to be described by rules and/or optimal policy which are subject to switches over time. We find that US monetary and fiscal policy have often been in conflict, and that it is relatively rare that we observe the benign policy combination of an conservative monetary policy paired with a debt stabilizing fiscal policy. In a series of counterfactuals, a conservative central bank following a time-consistent fiscal policy leader would come close to mimicking the cooperative Ramsey policy. However, if policy makers cannot credibly commit to such a regime, monetary accommodation of the prevailing fiscal regime may actually be welfare improving.