Topics in Monetary Policy
Paper Session
Sunday, Jan. 8, 2023 1:00 PM - 3:00 PM (CST)
- Chair: Linda Hooks, Washington & Lee University
Is the Taylor Rule Still an Adequate Representation of Monetary Policy in Macroeconomic Models?
Abstract
Unclear. A Taylor Rule remains the consensus in macroeconomic models despite unconventional monetary policies (UMP) and the policy rate near zero in 2009-2015. We find structural breaks at 2007:Q3 in macro models with a shadow funds rate to control for UMP. Taylor Rule coefficients shift back toward pre-1984 estimates (relative increase in output gap weight). Significant breaks also occurred in non-policy parameters, altering shocks, dynamics, and output gaps. Results are similar with the effective funds rate, so either breaks are not due to UMP or the shadow rate is an insufficient specification of UMP in macro models.The Fed's Policy Rules and the Neutral Real Interest Rate
Abstract
The decline in the neutral real interest rate (r*) consistent with the Federal Reserve’s maximum employment and longer-run inflation objectives over the past 30 years has had profound implications for monetary policymaking and monetary policy evaluation. While various measures of r* were presented to the Federal Open Market Committee (FOMC) between 2001 and 2012 and policy rules have been presented to the FOMC between 2004 and (at least) 2016 and have been included in the Monetary Policy Report since 2017, neither of the neutral real rates in the policy rules is consistent with the Fed’s definition. We construct a measure of r*, which we call the single-equation measure, that is based on one of the measures presented to the FOMC and is consistent with the Fed’s definition. Using Taylor and balanced approach rules, our single-equation measure produces federal funds rate (FFR) prescriptions that provide a closer fit to the FFR than the measures used in the Fed’s policy rules.Conducting Unconventional Monetary Policy with Foreign Exchange Reserves
Abstract
This paper studies sterilized asset purchase programs in emerging markets and developing economies. Sterilized asset purchase is an unconventional monetary policy implemented for the first time during the recent COVID-19 crisis. The paper provides a theoretical framework to examine the effectiveness and design of this new policy tool. The model economy is vulnerable to sudden stops due to financial market imperfection and liability dollarization. In a sudden stop, the balance sheet effect is triggered, causing large contractions in real economic activities. Instead of constrained domestic banks, the consolidated government plays a key role in funding intermediation. Sterilized asset purchases by the government break down the balance sheet effect, relaxing banks' constraint. The policy effectively mitigates the impact of sudden stop, improving welfare. The policy trade-offs are also discussed. Deep contractions in real activities can be avoided with a large-scale asset purchase. It might, however, potentially impede the economy's recovery. In terms of policy design, purchasing corporate bonds sterilized with foreign exchange reserves is most effective compared to other types of sterilized asset purchases.Big Techs and the Credit Channel of Monetary Policy
Abstract
We study how Big Tech’s entry into finance affects the transmission of monetary policy. Our empirical analysis suggests that Big Tech credit and bank credit react very differently to monetary policy. We rationalize these findings through the lens of a model where Big Techs facilitate firms’ matching on the trade platform and extend working capital loans, thus adding another source of finance to bank loans. The Big Tech firm reinforces credit repayment with the threat of exclusion from its ecosystem, while bank credit is secured against collateral. According to our model: (i) Big Tech credit reacts less to monetary policy due to a more muted response of firms’ profits as opposed to physical collateral; (ii) as matching efficiency on the Big Tech’s commerce platform rises, the expansion in firms’ profits leads to a higher share of Big Tech credit, and hence, to weaker responses of credit and output to monetary policy.Monetary Policy, Employment, and Firm Heterogeneity
Abstract
Using both public macro-level data and restricted administrative micro-level data, the paper presents new empirical evidence that in the U.S., employment by younger and smaller firms responds more to monetary policy shocks than that by older and larger firms. I find that younger and smaller firms rely on pledging personal houses as collateral to obtain bank loans, and thus, these firms are more sensitive to interest rate changes. I build a monetary business cycle model featuring housing collateral constraints that explains 67% of the heterogeneous employment responses found in the data.JEL Classifications
- E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit