Transcript of Monetary Policy Uncertainty: does it justify requiring the Fed to follow a Taylor rule?
- 1. Monetary Policy Uncertainty: Does it justify requiring the
Fed follow a Taylor rule? Jacques Alcabes, ngelo Gutirrez, Patrick
Mayer & Hugo Kaminski Barcelona Graduate School of Economics
June 2015
- 2. Motivation: Monetary Policy Uncertainty and the FRATA
Central banks role in failing to prevent or mitigate global crisis
Federal Reserve Accountability and Transparency Act introduced in
2014: The Fed would announce a policy rule and set the policy rate
according to this rule Any deviations from this rule or changes to
it would require testimony to Congress Key intention: reduce the
uncertainty related to central bank policy actions
- 3. Intense debate among economists...
- 4. Our contribution Methodology for constructing measures of
monetary policy uncertainty from monetary policy shocks previously
identied in the literature Index of monetary policy uncertainty
based on the unpredictability of the non-systemic movements of the
interest rate Use these measures to estimate the impact of monetary
policy uncertainty shocks to the economy as well as its
contribution to business cycles uctuations
- 5. Measuring Monetary Policy Shocks Monetary policy shocks are
usually interpreted in the literature as deviations from a Taylor
rule: it = i + y yt + t + i t Signicant body of research dealing
with the estimation of i t and its impact on the economy: Narrative
measures: (e.g., Romer & Romer (2004)) Structural VAR
estimates: (e.g., Sims & Zha (2006), Jurado et al. (2015))
Fancy stuff: Gertler & Karadi (2015)
- 6. Monetary Policy Shocks Romer & Romer (2004) - Narrative
Measure Sims & Zha (2006) - Time-Varying Parameter VAR 1960M2
1964M4 1968M6 1972M8 1976M10 1980M12 1985M2 1989M4 1993M6 1997M8
2001M10 2005M12 2010M2 10 5 0 5 1960M2 1964M4 1968M6 1972M8 1976M10
1980M12 1985M2 1989M4 1993M6 1997M8 2001M10 2005M12 2010M2 50 40 30
20 10 0 10 20 30 Gertler & Karadi (2015) - Proxy SVAR + HFI
Jurado, Ludvigson & Ng (2015) - Monetary SVAR 1960M2 1964M4
1968M6 1972M8 1976M10 1980M12 1985M2 1989M4 1993M6 1997M8 2001M10
2005M12 2010M2 0.5 0.4 0.3 0.2 0.1 0 0.1 0.2 1960M2 1964M4 1968M6
1972M8 1976M10 1980M12 1985M2 1989M4 1993M6 1997M8 2001M10 2005M12
2010M2 10 8 6 4 2 0 2 4 6 8
- 7. Monetary Policy Shocks: Rolling 2-year Standard Deviations
Romer & Romer (2004) Sims & Zha (2006) 1960M2 1964M4 1968M6
1972M8 1976M10 1980M12 1985M2 1989M4 1993M6 1997M8 2001M10 2005M12
2010M2 0 0.5 1 1.5 2 2.5 3 1960M2 1964M4 1968M6 1972M8 1976M10
1980M12 1985M2 1989M4 1993M6 1997M8 2001M10 2005M12 2010M2 0 5 10
15 Gertler & Karadi (2015) Jurado, Ludvigson & Ng (2015)
1960M2 1964M4 1968M6 1972M8 1976M10 1980M12 1985M2 1989M4 1993M6
1997M8 2001M10 2005M12 2010M2 0 0.01 0.02 0.03 0.04 0.05 0.06 0.07
0.08 0.09 0.1 1960M2 1964M4 1968M6 1972M8 1976M10 1980M12 1985M2
1989M4 1993M6 1997M8 2001M10 2005M12 2010M2 0 0.5 1 1.5 2 2.5 3
3.5
- 8. Monetary Policy Uncertainty We assume that i t has
stochastic volatility of the form: t = t t log 2 t = (1 ) log 2 +
log 2 t1 + t ; t iid (0, 1) t iid 0, 2 We follow Harvey (1994) and
compute the Quasi-Maximum Likelihood estimators of , 2 and 2 using
the Kalman Filter and an approximation to the measurement equation.
Then, we compute minimum MSE linear estimators t and t using the
Kalman Smoother.
- 9. Estimated Monetary Policy Uncertainty: Sims & Zha (2006)
1960M3 1963M7 1966M11 1970M3 1973M7 1976M11 1980M3 1983M7 1986M11
1990M3 1993M7 1996M11 2000M3 3 2 1 0 1 2 3 4 5 6
- 10. Dynamic Impact of Monetary Policy on the Economy Following
Jorda (2005), we compute the impulse-response function of these
shocks on several variables using local linear projections: IR (t,
h, dt ) =E (yt+h|vt = dt ; Xt ) E (yt+h|vt = 0; Xt ) = dt for h =
0, 1, . . . , H; dt { t , t }. These projections can be immediately
computed from sequential OLS regressions of yt+h on dt and
additional controls.
- 11. IRF Monetary Policy Uncertainty Shock: Sims & Zha
(2006) Industrial Production (Logs) Employment (Logs) 5 10 15 20 25
30 35 40 45 50 55 60 0.4 0.3 0.2 0.1 0 0.1 5 10 15 20 25 30 35 40
45 50 55 60 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 0.02 0.04 0.06
S&P 500 Index (Logs) Producer Price Index (Logs) 5 10 15 20 25
30 35 40 45 50 55 60 2 1.5 1 0.5 0 0.5 5 10 15 20 25 30 35 40 45 50
55 60 0.1 0.05 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35 0.4
- 12. Level Shock t vs. Variance Shock t Industrial Production
(Logs) Employment (Logs) 5 10 15 20 25 30 35 40 45 50 55 60 0.25
0.2 0.15 0.1 0.05 0 0.05 0.1 5 10 15 20 25 30 35 40 45 50 55 60 0.1
0.08 0.06 0.04 0.02 0 0.02 0.04 0.06 S&P 500 Index (Logs)
Producer Price Index (Logs) 5 10 15 20 25 30 35 40 45 50 55 60 1
0.8 0.6 0.4 0.2 0 0.2 0.4 0.6 5 10 15 20 25 30 35 40 45 50 55 60
0.2 0.15 0.1 0.05 0 0.05 0.1 0.15 0.2 0.25
- 13. Measuring Monetary Policy Uncertainty Following Jurado,
Ludvigson & Ng (2015), we compute the conditional volatility of
the purely unforecastable component of the interest rate Ui t = E
(it+1 E [it+1|It ])2 |It We call this a measure of interest rate
uncertainty. We compute a monetary policy uncertainty index as the
part of the interest rate uncertainty that is not related to macro
aggregate uncertainty.
- 14. Monetary Policy Uncertainty Index 0.00 0.20 0.40 0.60 0.80
1.00 1.20 -1.00 -0.50 0.00 0.50 1.00 1.50 1/1963 8/1964 3/1966
10/1967 5/1969 12/1970 7/1972 2/1974 9/1975 4/1977 11/1978 6/1980
1/1982 8/1983 3/1985 10/1986 5/1988 12/1989 7/1991 2/1993 9/1994
4/1996 11/1997 6/1999 1/2001 8/2002 3/2004 10/2005 5/2007 12/2008
7/2010 2/2012 9/2013 Interest Rate Uncertainty Monetary Policy
Uncertainty Macroeconomic Uncertainty Index (Right Axis)
- 15. Monetary Policy Uncertainty Index A B C D E -0.8 -0.6 -0.4
-0.2 0 0.2 0.4 0.6 0.8 1 1963 1965 1967 1969 1971 1973 1975 1977
1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003
2005 2007 2009 2011 2013 Fall of Continental Illinois, one of the
largest banks in the U.S. and a case of a "too big too fail" rescue
policy The start of Ben Bernanke as new Chairman of the Fed,
preceding the 2008 financial crisis Change in Fed leadership
replacing Arthur Burns with G. William Miller. Replaced a year
later by Volcker Start of Arthur Burns as new Fed Chairman
- 16. Forecast Error Variance Decomposition Variable Shock
Horizon IPI Employment PCE De S&P 500 Monetary Policy 6 2.11
0.80 2.24 1.21 Uncertainty 60 2.37 1.63 1.08 3.38 Aggregate Macro 6
3.39 2.90 1.42 8.39 Uncertainty 60 9.39 13.9 0.90 12.3 Federal
Funds 6 2.78 2.34 0.47 2.42 Rate 60 23.3 36.1 18.1 1.24
- 17. Summary Monetary policy uncertainty has statistically
signicant effects that resemble the effects of a traditional
monetary policy shock but: More delayed effect and stronger impact
on nancial variables. Monetary policy uncertainty shocks are not a
major contributor to business cycle uctuations: They explain less
than 4% of the forecast error variance of Industrial Production,
employment and ination after a year . This evidence suggests that
the potential benets of requiring the Fed to follow a policy rule
are small if the main purpose is merely to reduce policy
uncertainty.
- 18. Thank You!
- 19. Appendix: Variables of Estimated VAR Yt = log (real IP) log
(employment) log (real consumption) log (PCE deator) log (real new
orders) log (real wage) hours federal funds rate log (S&P 500
Index) log (M2) Monetary Policy Index Macro Uncertainty
- 20. Appendix: Baseline Specication for the LP Yt+h =hdt + p i=1
ihYti + q i=1 ihiti + q i=1 ih2 ti + t For h = 0, 1, . . . 60.
Newey-West estimator for the standard errors, with bandwidth equal
to h. p = q = 12 in baseline scenario.
- 21. Appendix: IRF MPU Shock Romer & Romer (2004) Industrial
Production (Logs) Employment (Logs) 5 10 15 20 25 30 35 40 45 50 55
60 0.4 0.3 0.2 0.1 0 0.1 0.2 0.3 0.4 0.5 5 10 15 20 25 30 35 40 45
50 55 60 0.2 0.15 0.1 0.05 0 0.05 0.1 0.15 0.2 0.25 S&P 500
Index (Logs) Producer Price Index (Logs) 5 10 15 20 25 30 35 40 45
50 55 60 1.5 1 0.5 0 0.5 1 5 10 15 20 25 30 35 40 45 50 55 60 0.2
0.1 0 0.1 0.2 0.3
- 22. Appendix: IRF MPU Shock Gertler & Karadi (2015)
Industrial Production (Logs) Employment (Logs) 5 10 15 20 25 30 35
40 45 50 55 60 0.25 0.2 0.15 0.1 0.05 0 0.05 0.1 0.15 0.2 5 10 15
20 25 30 35 40 45 50 55 60 0.08 0.06 0.04 0.02 0 0.02 0.04 0.06
0.08 S&P 500 Index (Logs) Producer Price Index (Logs) 5 10 15
20 25 30 35 40 45 50 55 60 1 0.5 0 0.5 5 10 15 20 25 30 35 40 45 50
55 60 0.12 0.1 0.08 0.06 0.04 0.02 0 0.02 0.04 0.06 0.08
- 23. Appendix: IRF MPU Shock JLN (2015) Industrial Production
(Logs) Employment (Logs) 5 10 15 20 25 30 35 40 45 50 55 60 0.3
0.25 0.2 0.15 0.1 0.05 0 0.05 0.1 0.15 5 10 15 20 25 30 35 40 45 50
55 60 0.12 0.1 0.08 0.06 0.04 0.02 0 0.02 S&P 500 Index (Logs)
Producer Price Index (Logs) 5 10 15 20 25 30 35 40 45 50 55 60 1.6
1.4 1.2 1 0.8 0.6 0.4 0.2 0 5 10 15 20 25 30 35 40 45 50 55 60 0.1
0.05 0 0.05 0.1 0.15 0.2 0.25 0.3 0.35
- 24. Appendix: IRF MPU Shock (36 lags) Romer & Romer (2004)
Industrial Production (Logs) Employment (Logs) 5 10 15 20 25 30 35
40 45 50 55 60 0.25 0.2 0.15 0.1 0.05 0 0.05 0.1 0.15 5 10 15 20 25
30 35 40 45 50 55 60 0.08 0.06 0.04 0.02 0 0.02 0.04 0.06 0.08 0.1
S&P 500 Index (Logs) Producer Price Index (Logs) 5 10 15 20 25
30 35 40 45 50 55 60 1 0.5 0 0.5 1 5 10 15 20 25 30 35 40 45 50 55
60 0.15 0.1 0.05 0 0.05 0.1 0.15
- 25. Appendix: IRF MPU Shock (36 lags) Sims & Zha (2006)
Industrial Production (Logs) Employment (Logs) 5 10 15 20 25 30 35
40 45 50 55 60 0.6 0.5 0.4 0.3 0.2 0.1 0 0.1 0.2 0.3 5 10 15 20 25
30 35 40 45 50 55 60 0.25 0.2 0.15 0.1 0.05 0 0.05 0.1 S&P 500
Index (Logs) Producer Price Index (Logs) 5 10 15 20 25 30 35 40 45
50 55 60 4 3.5 3 2.5 2 1.5 1 0.5 0 0.5 1 5 10 15 20 25 30 35 40 45
50 55 60 0.2 0 0.2 0.4 0.6 0.8
- 26. Appendix: IRF MPU Shock (36 lags) Gertler & Karadi
(2015) Industrial Production (Logs) Employment (Logs) 5 10 15 20 25
30 35 40 45 50 55 60 0.3 0.2 0.1 0 0.1 0.2 0.3 0.4 5 10 15 20 25 30
35 40 45 50 55 60 0.06 0.04 0.02 0 0.02 0.04 0.06 0.08 S&P 500
Index (Logs) Producer Price Index (Logs) 5 10 15 20 25 30 35 40 45
50 55 60 1 0.5 0 0.5 1 5 10 15 20 25 30 35 40 45 50 55 60 0.15 0.1
0.05 0 0.05 0.1
- 27. Appendix: IRF MPU Shock (36 lags) JLN (2015) Industrial
Production (Logs) Employment (Logs) 5 10 15 20 25 30 35 40 45 50 55
60 0.3 0.25 0.2 0.15 0.1 0.05 0 0.05 0.1 0.15 5 10 15 20 25 30 35
40 45 50 55 60 0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 0.02 S&P 500
Index (Logs) Producer Price Index (Logs) 5 10 15 20 25 30 35 40 45
50 55 60 1.2 1 0.8 0.6 0.4 0.2 0 5 10 15 20 25 30 35 40 45 50 55 60
0.1 0.05 0 0.05 0.1 0.15 0.2 0.25
- 28. Appendix: IRF Level Monetary Policy Shock NKM Model Without
Capital 5 10 15 3 2 1 0 ys_t 5 10 15 3 2 1 0 n_t 5 10 15 0.2 0.15
0.1 0.05 0 infl_t 5 10 15 0.5 0 0.5 1 r_t 5 10 15 0.5 0 0.5 1
i_t
- 29. Appendix: IRF Variance Monetary Policy Shock NKM Model
Without Capital 5 10 15 0.8 0.6 0.4 0.2 0 ys_t 5 10 15 0.8 0.6 0.4
0.2 0 n_t 5 10 15 0 0.05 0.1 0.15 0.2 infl_t 5 10 15 0.1 0.05 0
0.05 0.1 r_t 5 10 15 0 0.05 0.1 i_t 5 10 15 0 0.5 1 sigma_t