Solving the price puzzle with an alternative indicator of monetary policy

Keating, John W.; Kelly, Logan; Valcarcel, Victor J.

doi:10.1016/j.econlet.2014.05.012

Cited by 29 publications

(23 citation statements)

References 13 publications

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“…The same analyses with simple-sum money indicators led to weaker results. Keating et al (2014) showed that a structural vector- autoregressive (SVAR) model with Divisia-money worked as well as the model with the Federal funds rate before the crisis. It worked equally well in the sample period that includes the zero lower bound when the Federal funds rate model could not be used.…”

Section: Introductionmentioning

confidence: 99%

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Does money matter in the euro area? Evidence from a new Divisia index

Darvas

2015

Economics Letters

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• Money has virtually disappeared from standard monetary models:• Empirical failures: estimated money demand functions found to be unstable; money proved to be less effective in predicting economic outcomes;• Policy shifts: central banks focus on interest rates;• Theory: development of theories suggesting that money is redundant.• Measurement problem?• Standard (simple sum) monetary aggregates were used, but:• E.g. cash and bank debt securities quite different, yet simple sum money aggregation assumes they are perfect substitutes • Correct aggregation: using either aggregation theory or index number theory;• Barnett (1980): use the discrete-time Törnquist-Theil approximation of the Divisia index;• Divisia money aggregates weight the components according to their "moneyness", i.e. according to their usefulness in making transactions;• For the US, it is found that money demand for divisia is stable; divisia works better than simple sum aggregates in VARs; divisia helps to predict inflation and nominal GDP (some recent works: Hendrickson (2013, Macr

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Section: Introductionmentioning

confidence: 99%

“…1 Other reasons include policy shifts by central banks to focus on interest rates and the development of theories suggesting that money is redundant (Leeper and Roush, 2003;Belongia and Ireland, 2015;Keating et al, 2014).…”

Section: Introductionmentioning

confidence: 99%

Does money matter in the euro area? Evidence from a new Divisia index

Darvas

2015

Economics Letters

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“…However, without a proper identification scheme, this measure has some shortcomings as the exchange rate is subjected to influences other than monetary policy decisions. Some economists revisit monetary aggregates and supply evidence that a superlative measure of money (i.e., Divisia monetary index) can properly reflect the stance of monetary policy in structural VAR (SVAR) models, especially in the aftermath of the 2007 financial crisis (Keating et al, 2014(Keating et al, , 2019.…”

Section: Introductionmentioning

confidence: 99%

The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission

Chen

2019

SSRN Journal

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The federal funds rate became uninformative about the stance of monetary policy from December 2008 to November 2015. During the same period, unconventional monetary policy actions, like large-scale asset purchases, show the Federal Reserve's intention to depress longer-term interest rates. This paper considers a long-term real interest rate as an alternative monetary policy indicator in a structural VAR framework. Based on an event study of FOMC announcements, I advance a novel measure of long-term interest rate volatility with important implication for monetary policy identification. I find that monetary policy shocks identified with this volatility measure drive significant swings in credit market sentiments and real output. In contrast, monetary policy shocks identified by otherwise standard unexpected policy rate changes lead to muted responses of financial frictions and production. Our results support the validity of the risk-taking channel and suggest an indispensable role of financial markets in monetary policy transmission.

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“…In determination of both types of restrictions previous studies and certain facts are utilized. Following Keating (1992) and Keating et al (2014), both measures of interest rate and money are included besides the output and prices in the model setting so as to see the responses to different policy instruments when interest rates and money supply are simultaneously represented within SVAR system. Given a relatively short sample period, a 4-variable SVAR model is preferred.…”

Section: Svar Modelmentioning

confidence: 99%

Divisia and Simple Sum Monetary Aggregates: Any Empirical Relevance for Turkey?

Polat

2018

Journal of Central Banking Theory and Practice

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In consideration of channels through which monetary policy affects economic activity, the monetary aggregates have been mostly ignored by the monetary authorities instead of which shortrun interest rates have been given a priori role. These monetary aggregates are largely argued to fail in measuring the effectiveness of different monetary policy regimes in forecasting the macroeconomic fundamentals. Grounded on the "Barnett critique", the formation of traditional simple-sum monetary aggregates assuming for perfect substitution among the components of the money supply is blamed for such a failure of money in explaining the real activity. Given increasing varieties of financial assets which have completely different "moneyness", it is important to provide an alternative measure of the money supply. Hereby, the Divisia monetary aggregates which give different weights to different assets have arisen as an alternative approach. In this study, a Divisia index is constructed to test its predictive power on quantities and prices compared to its simple sum counterpart. Accordingly, a Divisia index is built-up for Turkish economy for the period 2006-2016 to see whether the utilization of the Divisia monetary aggregates in the conduct of monetary policy makes any difference compared to that of traditional simple sum money supply. Under different specifications, though the relative power of the Divisia aggregates in predicting quantity and price variables is found, still, it can be argued that theoretically well-rounded formation of the Divisia index is not that much empirically justified for the case of Turkey.

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Solving the price puzzle with an alternative indicator of monetary policy

Cited by 29 publications

References 13 publications

Does money matter in the euro area? Evidence from a new Divisia index

Does money matter in the euro area? Evidence from a new Divisia index

The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission

Divisia and Simple Sum Monetary Aggregates: Any Empirical Relevance for Turkey?

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