Unconventional monetary policy reaction functions: evidence from the US

We specify unconventional monetary policy reaction functions for the Fed using linear and nonlinear econometric frameworks. We find that nonstandard policy measures are largely driven by the dynamics of inflation and the output gap, with the effect being particularly strong during QE rounds. Moreove...

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Bibliographic Details
Published in:Studies in nonlinear dynamics and econometrics 2020-09, Vol.24 (4), p.1-18
Main Authors: Agnello, Luca, Castro, Vitor, Dufrénot, Gilles, Jawadi, Fredj, Sousa, Ricardo M.
Format: Article
Language:English
Subjects:
asset prices
Assets
Bank reserves
central bank reserves
Central banks
E21
E43
E51
E53
Econometrics
Economic crisis
Economics and Finance
Growth rate
Humanities and Social Sciences
Inflation
Keynesian theory
Monetary policy
nonlinear models
output gap
shadow short rate
Systematic review
term spread
Toolkits
unconventional monetary policy reaction function
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Summary:We specify unconventional monetary policy reaction functions for the Fed using linear and nonlinear econometric frameworks. We find that nonstandard policy measures are largely driven by the dynamics of inflation and the output gap, with the effect being particularly strong during QE rounds. Moreover, we uncover the presence of asymmetry and regime dependence in central bank’s actions since the global financial crisis, especially concerning the response of the term spread and the shadow short rate to the growth rate of central bank reserves. From a policy perspective and given the lack of a systematic response of monetary policy to asset price growth in nonstandard times, our findings seem to corroborate the view that concerns about asset price bubbles, financial sector pro-cyclicality and systemic risk should be part of the macro-prudential policy toolkit.
ISSN:1081-1826
1558-3708
DOI:10.1515/snde-2018-0088