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Measuring the stance of monetary policy in conventional and unconventional environments

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  • Leo Krippner

Abstract

This article introduces an idea for summarizing of the stance of monetary policy with quantities derived from a class of yield curve models that respect the zero lower bound constraint for interest rates. The “economic stimulus measure” aggregates the current and estimated expected path of interest rates relative to the neutral interest rate from the yield curve model. Unlike shadow short rates, economic stimulus measures are consistent and comparable across conventional and unconventional monetary policy environments, and are less subject to variation with modelling choices, as I demonstrate with two and three factor models estimated with different data sets. Full empirical testing of the inter-relationships between ES measures and macroeconomic data remains a topic for future work.

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Bibliographic Info

Paper provided by Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University in its series CAMA Working Papers with number 2014-06.

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Length: 39 pages
Date of creation: Jan 2014
Date of revision:
Handle: RePEc:een:camaaa:2014-06

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Keywords: Unconventional monetary policy; zero lower bound; shadow short rate; term structure model;

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References

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  1. Mohamed Safouane Ben Aissa & Jamel Jouini, 2003. "Structural breaks in the US inflation process," Applied Economics Letters, Taylor & Francis Journals, Taylor & Francis Journals, vol. 10(10), pages 633-636.
  2. Refet Gürkaynak & Brian Sack, 2005. "Do Actions Speak Louder Than Words?The Response of Asset Prices to Monetary Policy Actions and Statements," Computing in Economics and Finance 2005, Society for Computational Economics 323, Society for Computational Economics.
  3. Diebold, Francis X. & Rudebusch, Glenn D. & Borag[caron]an Aruoba, S., 2006. "The macroeconomy and the yield curve: a dynamic latent factor approach," Journal of Econometrics, Elsevier, Elsevier, vol. 131(1-2), pages 309-338.
  4. Leo Krippner, 2012. "Modifying Gaussian term structure models when interest rates are near the zero lower bound," Reserve Bank of New Zealand Discussion Paper Series DP2012/02, Reserve Bank of New Zealand.
  5. Krippner, Leo, 2013. "Measuring the stance of monetary policy in zero lower bound environments," Economics Letters, Elsevier, Elsevier, vol. 118(1), pages 135-138.
  6. Black, Fischer, 1995. " Interest Rates as Options," Journal of Finance, American Finance Association, American Finance Association, vol. 50(5), pages 1371-76, December.
  7. Nelson, Charles R & Siegel, Andrew F, 1987. "Parsimonious Modeling of Yield Curves," The Journal of Business, University of Chicago Press, University of Chicago Press, vol. 60(4), pages 473-89, October.
  8. Michael D. Bauer & Glenn D. Rudebusch, 2013. "Monetary policy expectations at the zero lower bound," Working Paper Series, Federal Reserve Bank of San Francisco 2013-18, Federal Reserve Bank of San Francisco.
  9. Kim, Don H. & Singleton, Kenneth J., 2012. "Term structure models and the zero bound: An empirical investigation of Japanese yields," Journal of Econometrics, Elsevier, Elsevier, vol. 170(1), pages 32-49.
  10. Leo Krippner, 2012. "A theoretical foundation for the Nelson and Siegel class of yield curve models," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2012-11, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  11. Leo Krippner, 2006. "A Theoretically Consistent Version of the Nelson and Siegel Class of Yield Curve Models," Applied Mathematical Finance, Taylor & Francis Journals, Taylor & Francis Journals, vol. 13(1), pages 39-59.
  12. Leo Krippner, 2013. "A tractable framework for zero-lower-bound Gaussian term structure models," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2013-49, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  13. Leo Krippner, 2013. "Faster solutions for Black zero lower bound term structure models," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2013-66, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
  14. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "An Intertemporal General Equilibrium Model of Asset Prices," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 363-84, March.
  15. Fama, Eugene F & Bliss, Robert R, 1987. "The Information in Long-Maturity Forward Rates," American Economic Review, American Economic Association, American Economic Association, vol. 77(4), pages 680-92, September.
  16. repec:fip:fedlps:y:2012:i:nov8 is not listed on IDEAS
  17. Carl E. Walsh, 2003. "Monetary Theory and Policy, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 0262232316, December.
  18. Leo Krippner, 2008. "A Macroeconomic Foundation for the Nelson and Siegel Class of Yield Curve Models," Research Paper Series, Quantitative Finance Research Centre, University of Technology, Sydney 226, Quantitative Finance Research Centre, University of Technology, Sydney.
  19. Cox, John C & Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1985. "A Theory of the Term Structure of Interest Rates," Econometrica, Econometric Society, Econometric Society, vol. 53(2), pages 385-407, March.
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Cited by:
  1. Hännikäinen, Jari, 2014. "Zero lower bound, unconventional monetary policy and indicator properties of interest rate spreads," MPRA Paper 56737, University Library of Munich, Germany.
  2. Edda Claus & Iris Claus & Leo Krippner, 2014. "Asset markets and monetary policy shocks at the zero lower bound," CAMA Working Papers, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University 2014-42, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.

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