The large recession that followed the Global Financial Crisis of 2008-09 triggered unprecedented monetary policy easing around the world. Most central banks in advanced economies deployed new instruments to affect credit conditions and to provide liquidity at a large scale after shortterm policy rates reached their effective lower bound. In this paper, we study if this new set of tools, commonly labeled as unconventional monetary policies (UMP), should still be used when economic conditions and interest rates normalize. In particular, we study the optimality of asset purchase programs by using an estimated non-linear DSGE model with a banking sector and long-term private and public debt for the United States. We find that the benefits of using such UMP in normal times are substantial, equivalent to 1.45 percent of consumption. However, the benefits from using UMP are shock-dependent and mostly arise when the economy is hit by financial shocks. When more traditional business cycle shocks (such as supply and demand shocks) hit the economy, the benefits of using UMP are negligible or zero.
, P. ( 2013 ). The Business Cycle Implications of Banks Maturity Transformation . Review of Economic Dynamics, 16 ( 4 ), 581 – 600 .
Andreasen , M. M. , Ferman , M. and Zabczyk , P. Fernández-Villaverde , J. and Rubio-Ramírez , J. F. ( 2016 ). The Pruned State-Space System for Non-LinearDSGEModels: Theory and Empirical Applications . Mimeo, University of Pennsylvania.
Calvo , G. ( 1983 ). Staggered Prices in a Utility-Maximizing Framework . Journal of Monetary Economics, 12 ( 3 ), 383 – 398 .
Carlstrom , C. T
Huixin Bi, Ms. Wenyi Shen, and Susan Yang Shu-Chun
This paper studies the main channels through which interest rate normalization has fiscal implications in the United States. While unexpected inflation reduces the real value of government liabilities, a rising policy rate increases government financing needs because of higher interest payments and lower real bond prices. After an initial decline, the real government debt burden rises even with higher tax revenues in an expansion. Given the current net debt-to-GDP ratio at around 80 percent, interest rate normalization leads to a negligible increase in the sovereign default risk of the U.S. federal government, despite a much higher federal debt-to-GDP ratio than the post-war historical average.
Illustration from a Non-LinearDSGEModel
7.Non-UMP Countries’ Exposure and Resilience to Market Volatility and Capital Outflows
1.Cumulative Effects of Bond Purchases on 10-Year Government Bonds
2.United States: Flattening Phillips Curve
Summary of Empirical Studies on the Macro Effects of UMP
Supplemental Results and Analysis
Spillover Effects of UMP: Selected Literature Review
Asset Backed Securities
Monetary Fund Working Paper 20/151, August 2020 .
Ajello , Andrea , Tomas Laubach , David Lopez-Salido and Taisuke Nakata . 2019 “ Financial Stability and Optimal Interest Rate Policy .” International Journal of Central Banking 15 ( 1 ): 279 – 326 .
Andreasen , Martin , Jesús Fernández-Villaverde , and Juan Rubio-Ramírez . 2016 . “ The Pruned State-Space System for Non-LinearDSGEModels: Theory and Empirical Applications .” The Review of Economic Studies 85 ( 1 ): 1 – 49 . 10.1093/restud/rdx037
Bernanke , Ben S
This paper takes stock of unconventional monetary policies (UMP) and their impact so far, and looks ahead towards exit and prospects for policy coordination. It synthesizes earlier staff work on UMP,1 the findings of a substantial and growing academic and central banking literature, as well as further staff analysis contained in the Background Paper. While some widely accepted conclusions have emerged from the large and growing number of studies on UMP, many important questions remain unsettled, as enough time has not elapsed to draw definitive conclusions. In those cases, the paper will pose the relevant questions and provide possible nswers, while recognizing the uncertainty that remains.
. Moreover, contagion effects could both amplify and broaden asset price movements and capital outflows as investors contemporaneously flock out of EMEs ( Forbes and Rigobon, 2002 ). The co- movement in capital flows was noticeably higher following announcements of Fed tapering than following earlier announcements of asset purchases (details are given in the Background Paper). ( Box 6 ) illustrates the potential amplification of shocks during exit using the non-linearDSGEmodel introduced in Box 1 . As is typical in stretched markets, the bust appears much more abrupt
Alexandra Fotiou, Ms. Wenyi Shen, and Susan Yang Shu-Chun
Using the post-WWII data of U.S. federal corporate income tax changes, within a Smooth Transition VAR, this paper finds that the output effect of capital income tax cuts is government debt-dependent: it is less expansionary when debt is high than when it is low. To explore the mechanisms that can drive this fiscal state-dependent tax effect, the paper uses a DSGE model with regime-switching fiscal policy and finds that a capital income tax cut is stimulative to the extent that it is unlikely to result in a future fiscal adjustment. As government debt increases to a sufficiently high level, the probability of future fiscal adjustments starts rising, and the expansionary effects of a capital income tax cut can diminish substantially, whether the expected adjustments are through a policy reversal or a consumption tax increase. Also, a capital income tax cut need not always have large revenue feedback effects as suggested in the literature.
International Monetary Fund. Western Hemisphere Dept.
measures of the financial cycle.
Box 5. Systemic Risk and Monetary Policy 1
Analytical framework . A non-linearDSGEmodel (that has reasonable macro and asset pricing properties, an explicit intermediation system, and endogenous variation in systemic risk) allows for a joint analysis of monetary policy and financial stability risks. 2
Results . The main findings provide insights about the optimal conduct of monetary policy in the context of time-varying and endogenously determined risk premia and systemic risk:
Financial variables (i.e. financial leverage or
Mr. Jiaqian Chen, Daria Finocchiaro, Jesper Lindé, and Karl Walentin
We examine the effects of various borrower-based macroprudential tools in a New Keynesian environment where both real and nominal interest rates are low. Our model features long-term debt, housing transaction costs and a zero-lower bound constraint on policy rates. We find that the long-term costs, in terms of forgone consumption, of all the macroprudential tools we consider are moderate. Even so, the short-term costs differ dramatically between alternative tools. Specifically, a loan-to-value tightening is more than twice as contractionary compared to loan-to-income tightening when debt is high and monetary policy cannot accommodate.