The Importance of Stock Market Returns in Estimated Monetary Policy Rules: a Structural Approach

This paper estimates a standard version of the New Keynesian Monetary (NKM) model augmented with financial variables in order to analyze the relative importance of stock market returns and term spread in the estimated U.S. monetary policy rule. The estimation procedure implemented is a classical structural method based on the indirect inference principle. The empirical results show that the Fed seems to respond to the macroeconomic outlook and to the stock market return but does not seem to respond to the term spread. Moreover, policy inertia and persistent policy shocks are also significant features of the estimated policy rule.

Term Structure and the Estimated Monetary Policy Rule in the Eurozone

Published as an article in: Spanish Economic Review, 2008, vol. 10, issue 4, pages 251-277.

Time Variation in an Optimal Asymmetric Preference Monetary Policy Model

This paper considers a time varying parameter extension of the Ruge-Murcia (2003, 2004) model to explore whether some of the variation in parameter estimates seen in the literature could arise from this source. A time varying value for the unemployment volatility parameter can be motivated through several means including variation in the slope of the Phillips curve or variation in the preferences of the monetary authority.We show that allowing time variation for the coefficient on the unemployment volatility parameter improves the model fit and it helps to provide an explanation of inflation bias based on asymmetric central banker preferences, which is consistent across subsamples.

Optimal Monetary Policy with Asymmetric Preferences for Output

Using a model of an optimizing monetary authority which has preferences that weigh inflation and unemployment, Ruge-Murcia (2003, 2004) finds empirical evidence that the authority has asymmetric preferences for unemployment. We extend this model to weigh inflation and output and show that the empirical evidence using these series also supports an asymmetric preference hypothesis, only in our case, preferences are asymmetric for output. We also find evidence that the monetary authority targets potential output rather than some higher output level as would be the case in an extended Barro and Gordon (1983) model.

Continuity and change in monetary policy and banking in Ireland 1922-43

The primary objective of this thesis is to examine the development of monetary policy and banking in southern Ireland from the attainment of independence in 1922 (gained through the Anglo-Irish Treaty of 1921) to the establishment of the Central Bank of Ireland in 1943. This research serves to challenge the overwhelming concentration on the findings of a small number of major works, most notably by Ronan Fanning, Maurice Moynihan and Cormac Ó’Gráda, in the existing historiography. This thesis is based on the research hypothesis that there were two key factors impacting on the development of monetary and banking institutions in Ireland in the 1922-1943 period. First, an exogenous institutional context, primarily Anglo-Irish in focus, in which the wider macroeconomic landscape directly influenced monetary policy and banking in Ireland. Second, an individualist context in which the development of relationships between key individuals dictated development patterns and institutional structures. This research highlights that key Irish policymakers, such as Joseph Brennan, evidenced a more flexible and realistic approach to banking and monetary affairs than is currently recognised. It also develops three further issues which have been overlooked in the existing historiography. First, a germ of monetary reform existed in Ireland from as early as the mid-1920s and was consistent in promoting alternative policies in the period to 1943. Second, this research challenges the view that the creation of the Currency Commission in 1927 and the establishment of the Central Bank of Ireland in 1943 were insignificant events given the continued stagnation in Irish monetary policy in the decades after 1943. Third, this thesis identifies that wider international trends did influence Irish monetary and banking affairs in the 1922-43 period. At both an institutional and more individual level the process of monetary institution building in Ireland was directly impacted by wider international experiences.

A Note on Studies of Monetary Policy and Implementation in Vietnam

In this short paper, we have gone through some key results of monetary policy research applied for the Vietnamese economy, over the past 20 years after Doi Moi, together with a few caveats when putting these results in use. We look at different research themes, and suggest that future research make better and more diverse choice of analytic framework, and also put macro and micro-setting connection at work, which appear to likely bring about better and more insightful results for the monetary economics literature in Vietnam.

The G20 and Monetary Policy Stasis

Since the financial crash of 2008 monetary policy has been in a state of stasis – a condition in which things are not changing, moving, or progressing, but rather appear frozen. Interest rates have been frozen at low levels for a considerable period time. Inflation targets have consistently been missed, through phases of both overshooting and undershooting. At the same time, a variety of unconventional monetary policies involving asset purchases and liquidity provision have been pursued. Questions have been raised from a variety of sources, including various international organizations, covering distinct BIS and IMF positions about the continuing validity and sustainability of existing monetary policy frameworks, not least because inflation targeting has ceased to act as reliable guide for policy for over six years. Despite this central banks have been reluctant to debate moving to a new formal policy framework. This article argues that as an apex policy forum only the G20 leaders’ summits has the necessary political authority to call their central banks to account and initiate a wide ranging debate on the future of monetary policy. A case is made for convening a monetary policy working group to discuss a range of positions, including those of the BIS and IMF, and to make recommendations, because the G20 has been most effective in displaying international financial leadership, when leaders have convened and made use of specialist working groups.

Inflation targeting and the consistency of monetary policy decisions in Mexico: an empirical analysis with discrete choice models

This paper examines the nature of monetary policy decisions in Mexico using discrete choice models applied to the Central Bank's explicit monetary policy instrument. We find that monetary policy adjustments in Mexico have been strongly consistent with the CB's inflation targeting strategy. We also find evidence that monetary policy responds in a forward-looking manner to deviations of inflation from the target and that observed policy adjustments exhibit asymmetric features, with stronger responses to positive than to negative deviations of inflation from the target and a greater likelihood of policy persistence during periods when monetary policy is tightened, compared with periods when policy is loosened.

Monetary policy, exchange rates and stock prices in the Middle East region

A structural vector autoregressive model is employed to investigate the impact of monetary policy and real exchange rate shocks on the stock market performance of Kuwait, Oman, Saudi Arabia, Egypt and Jordan. In order to identify the structural shocks both short run and long run restrictions are applied. Unlike previous literature the contemporaneous interdependence between the financial variables are left unrestricted to give a more accurate depiction of the relationships. The heterogeneity of the results reflect the different monetary policy frameworks and stock market characteristics of these countries. Mainly, monetary policy and the real exchange rate shocks have a significant short run impact on the stock prices of the countries that apply a relatively more independent monetary policy and flexible exchange rates.

Liquidity, business cycles and monetary policy: A simulation

A Masters Thesis, presented as part of the requirements for the award of a Research Masters Degree in Economics from NOVA – School of Business and Economics

Macroeconomic effects of monetary policy in the Eurozone

To study the macroeconomic effects of unconventional monetary policy across the different countries of the eurozone, I develop an identification scheme to disentangle conventional from non-conventional policy shocks, using futures contracts on overnight interest rates and the size of the European Central Bank balance sheet. Setting these shocks as endogenous variables in a structural vector autoregressive (SVAR) model, along with the CPI and the employment rate, estimated impulse response functions of policy to macroeconomic variables are studied. I find that unconventional policy shocks generated mixed effects in inflation but had a positive impact on employment, with the exception of Portugal, Spain, Greece and Italy where the employment response is close to zero or negative. The heterogeneity that characterizes the responses shows that the monetary policy measures taken in recent years were not sufficient to stabilize the economies of the eurozone countries under more severe economic conditions.

Search-for-yield in Portuguese fixed-income mutual funds and monetary policy

This paper studies the effects of monetary policy on mutual fund risk taking using a sample of Portuguese fixed-income mutual funds in the 2000-2012 period. Firstly I estimate time-varying measures of risk exposure (betas) for the individual funds, for the benchmark portfolio, as well as for a representative equally-weighted portfolio, through 24-month rolling regressions of a two-factor model with two systematic risk factors: interest rate risk (TERM) and default risk (DEF). Next, in the second phase, using the estimated betas, I try to understand what portion of the risk exposure is in excess of the benchmark (active risk) and how it relates to monetary policy proxies (one-month rate, Taylor residual, real rate and first principal component of a cross-section of government yields and rates). Using this methodology, I provide empirical evidence that Portuguese fixed-income mutual funds respond to accommodative monetary policy by significantly increasing exposure, in excess of their benchmarks, to default risk rate and slightly to interest risk rate as well. I also find that the increase in funds’ risk exposure to gain a boost in return (search-for-yield) is more pronounced following the 2007-2009 global financial crisis, indicating that the current historic low interest rates may incentivize excessive risk taking. My results suggest that monetary policy affects the risk appetite of non-bank financial intermediaries.