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Unconventional Monetary Policy

Paper Session

Saturday, Jan. 7, 2023 10:15 AM - 12:15 PM (CST)

New Orleans Marriott, Preservation Hall Studio 6
Hosted By: International Association of Applied Econometrics
  • Chair: Jonathan Wright, Johns Hopkins University

Communicating Policy Uncertainty

Anna Cieslak
,
Duke University
Stephen Hansen
,
Oxford University
Michael McMahon
,
University of Oxford

Abstract

The importance of central bank communication has grown since the adoption of unconventional policy tools during the Global Financial Crisis. In terms of communicating uncertainty, policymakers face a trade-off between the effects of communicating greater uncertainty (pushing up longer-maturity yields and dampening the macroeconomy), and being open about how much uncertainty they face (recognizing that overconfidence can undermine their credibility). How is the Fed's communication of uncertainty affected by these trade-offs? Does the Fed provide a transparent account of its uncertainty in its public communication? We derive novel uncertainty indices for US monetary policy from texts related to the FOMC meetings. We distinguish between policymakers uncertainty in the minutes (released to the public shortly after each FOMC meeting) and the transcripts (released with a five-year lag). Transcripts capture a closer measure of the ``true” uncertainty that the FOMC perceives and reveals in their internal deliberations. The lag in the release of the transcripts serves as a device to identify any divergence in the uncertainty discussed in the policy meeting and the uncertainty that the Fed chooses to communicate to the public.

Unconventional Monetary Policy According to HANK

Eric Sims
,
Notre Dame
Cynthia Wu
,
Notre Dame
Ji Zhang
,
Tsinghua University

Abstract

This paper studies the implications of household heterogeneity for the effectiveness of quantitative easing (QE). We consider a heterogeneous agent New Keynesian (HANK) model with uninsurable household income risk. Financial intermediaries are subject to an endogenous leverage constraint that allows QE to matter. We find that macro aggregates react very similarly to a QE shock in a HANK model compared to a representative agent (RANK) version of the model. This finding is robust across different micro- and macro- distributions of wealth.

A Housing Portfolio Channel of QE Transmission

Dominik Boddin
,
Deutsche Bundesbank
Daniel Marcel Te Kaat
,
University of Groningen
Chang Ma
,
Fudan University
Alessandro Rebucci
,
Johns Hopkins University

Abstract

We document and quantify a housing portfolio channel of quantitative easing (QE) transmission. We identify this channel using household-level data in Germany in the context of a housing boom without a credit boom. We show that QE induces households with larger initial bond holdings to rebalance their portfolios toward housing. This effect is stronger when we focus on purchases of second homes, consistent with a buy-to-let motive. We also document a larger impact of QE on housing outcomes in more exposed regions, with house prices increasing more than rents and sale listings declining more than rental ones.

The Narrow Channel of Quantitative Easing: Evidence from Yield Curve Control Down Under

David Lucca
,
Jane Street
Jonathan Wright
,
Johns Hopkins University

Abstract

We study the recent Australian experience with yield curve control (YCC) of government bonds as perhaps the best evidence of how this policy might work in other developed economies. We interpret the evidence with a simple model in which YCC affects prices of both government and other bonds via “broad” transmission channels, but only government bond prices through “narrow” liquidity channels. YCC seemingly worked well in 2020 while the market expected short rates to stay at zero for long. But as the global recovery and inflation gained momentum in 2021, liftoff expectations moved up, the Reserve Bank of Australia purchased most of the outstanding amount of the targeted government bond, and its yield dislocated from other financial market instruments. The model and empirical evidence point to narrow transmission channels playing more prominent roles than broad channels considered in prior studies of quantitative easing (QE), such as portfolio balance effects and signaling about short term rates. We argue that asset-specific narrow channels may be primary transmission mechanisms of quantity-based QE policies as well.
JEL Classifications
  • E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit
  • C3 - Multiple or Simultaneous Equation Models; Multiple Variables