We show the importance of a dynamic aggregation bias in accounting for the PPP puzzle. We prove that the aggregate real exchange rate is persistent because its components have heterogeneous dynamics. Established time series and panel methods fail to control for this. Using Eurostat data, we find that when heterogeneity is taken into account, the estimated persistence of real exchange rates falls dramatically. Its half-life, for instance, may fall to as low as eleven months, significantly below the "consensus view" of three to five years.
Financial markets are central to the transmission of uncertainty shocks. This paper documents a new aspect of the interaction between the two by showing that uncertainty shocks have radically di¤erent macroeconomic implications depending on the state …nancial markets are in when they occur. Using monthly US data, we estimate a nonlinear VAR where economic uncertainty is proxied by the (unobserved) volatility of the structural shocks, and a regime change occurs whenever credit conditions cross a critical threshold. An exogenous increase in uncertainty has recessionary e¤ects in both good and bad credit regimes, but its impact on output is estimated to be …ve times larger when the economy is experiencing …nancial distress. Accounting for this nonlinearity, uncertainty accounts for about 1% of the peak fall in industrial production observed in
The UK has experienced a dramatic increase in earnings and income inequality over the past four decades. We use detailed micro level information to construct quarterly historical measures of inequality from 1969 to 2012. We investigate whether monetary policy shocks played a role in explaining this increase in inequality. We …nd that contractionary monetary policy shocks lead to an increase in earnings, income and consumption inequality and contribute to their ‡uctuation. The response of income and consumption at di¤erent quantiles suggests that contractionary policy has a larger negative e¤ect on low income households and those that consume the least when compared to those at the top of the distribution. Our evidence also suggests that the policy of quantitative easing may have contributed to the increase in inequality over the Great Recession.
This paper studies the impact of the volatility of monetary policy using a structural vector auroregression (SVAR) model enriched along two dimensions. First, it allows for time‐varying variance of monetary policy shocks via a stochastic volatility specification. Second, it allows a dynamic interaction between the level of the endogenous variables in the VAR and the time‐varying volatility. The analysis establishes that the nominal interest rate, output growth, and inflation fall in reaction to an increase in the volatility of monetary policy. The analysis also develops a dynamic stochastic general equilibrium model enriched with stochastic volatility to monetary policy that generates similar responses and provides a theoretical underpinning of these findings.
This article examines the macroeconomic impact of the first round of quantitative easing (QE) by the Bank of England. We attempt to quantify the effects of these purchases by focusing on the impact of lower long-term interest rates on the wider economy. We use three different models to estimate the impact of QE on output and inflation: a large Bayesian vector autoregression (VAR), a changepoint structural VAR and a time-varying parameter VAR. Our estimates suggest that QE may have had a peak effect on the level of real GDP of around 1 1 2 % and a peak effect on annual CPI inflation of about 1 1 4 % points.
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