Monetary Policy and Asset Valuation

Bianchi, Francesco; Lettau, Martin; Ludvigson, Sydney C.

doi:10.1111/jofi.13107

Cited by 71 publications

(21 citation statements)

References 76 publications

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“…Similar to Bianchi et al. (2022), we also display the monetary policy spread (right‐hand side), defined by the authors as the difference between the real and natural interest rate indicating the monetary policy stance. However, in our case, the real interest rate measure captures only the contributions of the inflation target shock, and consequently, the policy stance displayed on the right‐hand side of Figure 3 accounts only for the inflation target instrument.…”

Section: Resultsmentioning

confidence: 84%

The Federal Reserve's Implicit Inflation Target and Macroeconomic Dynamics: An Svar Analysis

Mumtaz

Theodoridis²

2023

Int Economic Review

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This article identifies shocks to the Federal Reserve's inflation target as vector autoregression innovations that make the largest contribution to future movements in long‐horizon inflation expectations. The effectiveness of this scheme is documented via Monte‐Carlo experiments. The estimated impulse responses indicate that a positive shock to the target is associated with a large increase in inflation and long‐term interest rates in the United States. Target shocks are estimated to be a vital factor behind the increase in inflation during the pre‐1980 period and are an important driver of the decline in long‐term interest rates over the last two decades.

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Section: Resultsmentioning

confidence: 84%

The Federal Reserve's Implicit Inflation Target and Macroeconomic Dynamics: An Svar Analysis

Mumtaz

Theodoridis²

2023

Int Economic Review

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“…Specifically, the output coefficient decreases (increases) towards the end (beginning) of a tightening cycle and monetary easings tend to be implemented quickly, while tightenings occur more gradually. Bianchi et al . (2022) documented large shifts in the parameters of the US monetary policy rule over the past few decades and concluded that infrequent changes in the monetary stance can lead to persistent shifts in the real interest rate and asset valuations.…”

Section: Literature Reviewmentioning

confidence: 99%

Time-varying parameters in monetary policy rules: a GMM approach

Anderl,

Caporale

2024

JES

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PurposeThe article aims to establish whether the degree of aversion to inflation and the responsiveness to deviations from potential output have changed over time.Design/methodology/approachThis paper assesses time variation in monetary policy rules by applying a time-varying parameter generalised methods of moments (TVP-GMM) framework.FindingsUsing monthly data until December 2022 for five inflation targeting countries (the UK, Canada, Australia, New Zealand, Sweden) and five countries with alternative monetary regimes (the US, Japan, Denmark, the Euro Area, Switzerland), we find that monetary policy has become more averse to inflation and more responsive to the output gap in both sets of countries over time. In particular, there has been a clear shift in inflation targeting countries towards a more hawkish stance on inflation since the adoption of this regime and a greater response to both inflation and the output gap in most countries after the global financial crisis, which indicates a stronger reliance on monetary rules to stabilise the economy in recent years. It also appears that inflation targeting countries pay greater attention to the exchange rate pass-through channel when setting interest rates. Finally, monetary surprises do not seem to be an important determinant of the evolution over time of the Taylor rule parameters, which suggests a high degree of monetary policy transparency in the countries under examination.Originality/valueIt provides new evidence on changes over time in monetary policy rules.

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“…The bifurcation from a stable price regime when 2αγ * > ψ 2 to the explosive regime when 2αγ * ≤ ψ 2 , just from a change of expectation of the reference price and/or earnings, provides a simple formal rationalisation of the common lore that financial markets are characterised by shifts between stable and unsustainable exuberant regimes. For instance, Bianci et al [2022] shows that the US economy can be characterised by longer-term regime shifts in asset values that synchronise with shifts in interest rates.…”

Section: Classification Of Two Different Regimesmentioning

confidence: 99%