Advanced Search
MyIDEAS: Login to save this paper or follow this series

Monetary policy shocks and foreign investment income: evidence from a large Bayesian VAR

Contents:

Author Info

  • Auer, Simone

    (Swiss National Bank)

Abstract

This paper assesses the transmission of monetary policy in a large Bayesian vector autoregression based on the approach proposed by Banbura, Giannone and Reichlin (2010). The paper analyzes the impact of monetary policy shocks in the United States and Canada not only on a range of domestic aggregates, trade flows, and exchange rates, but also foreign investment income. The analysis provides three main results. First, a surprise monetary policy action has a statistically and economically significant impact on both gross and net foreign investment income flows in both countries. Against the background of growing foreign wealth and investment income, this result provides preliminary evidence that foreign balance-sheet channels might play an increasingly important role for monetary transmission. Second, the impact of monetary policy on foreign investment income flows differs considerably across asset categories and over time, suggesting that the investment instruments and the currency denomination of a country’s foreign assets and liabilities are potentially relevant for the way in which monetary policy affects the domestic economy. Finally, the results support existing evidence on the effectiveness of large vector autoregressions and the Bayesian shrinkage approach in addressing the curse of dimensionality and eliminating price and exchange rate puzzles.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.dallasfed.org/assets/documents/institute/wpapers/2014/0170.pdf
File Function: Full text
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of Dallas in its series Globalization and Monetary Policy Institute Working Paper with number 170.

as in new window
Length: 49 pages
Date of creation: 13 Feb 2014
Date of revision:
Handle: RePEc:fip:feddgw:170

Contact details of provider:
Email:
Web page: http://www.dallasfed.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. A. Carriero & G. Kapetanios & M. Marcellino, 2008. "Forecasting Exchange Rates with a Large Bayesian VAR," Economics Working Papers, European University Institute ECO2008/33, European University Institute.
  2. Anil K Kashyap & Jeremy C. Stein & David W. Wilcox, 1992. "Monetary Policy and Credit Conditions: Evidence From the Composition of External Finance," NBER Working Papers 4015, National Bureau of Economic Research, Inc.
  3. Ashcraft, Adam B. & Campello, Murillo, 2007. "Firm balance sheets and monetary policy transmission," Journal of Monetary Economics, Elsevier, Elsevier, vol. 54(6), pages 1515-1528, September.
  4. Koray, Faik & McMillin, W. Douglas, 1999. "Monetary shocks, the exchange rate, and the trade balance," Journal of International Money and Finance, Elsevier, Elsevier, vol. 18(6), pages 925-940, December.
  5. Sims, Christopher A & Stock, James H & Watson, Mark W, 1990. "Inference in Linear Time Series Models with Some Unit Roots," Econometrica, Econometric Society, Econometric Society, vol. 58(1), pages 113-44, January.
  6. Christine De Mol & Domenico Giannone & Lucrezia Reichlin, 2008. "Forecasting using a large number of predictors: is Bayesian shrinkage a valid alternative to principal components?," ULB Institutional Repository 2013/6411, ULB -- Universite Libre de Bruxelles.
  7. Dées, Stéphane & di Mauro, Filippo & Pesaran, Hashem & Smith, Vanessa, 2005. "Exploring the international linkages of the euro area: a global VAR analysis," Working Paper Series, European Central Bank 0568, European Central Bank.
  8. Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
  9. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1603-1635, August.
  10. Robert B. Litterman, 1985. "Forecasting with Bayesian vector autoregressions five years of experience," Working Papers, Federal Reserve Bank of Minneapolis 274, Federal Reserve Bank of Minneapolis.
  11. Vittorio Grilli & Nouriel Roubini, 1995. "Liquidity Models in Open Economies: Theory and Empirical Evidence," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 95-16, New York University, Leonard N. Stern School of Business, Department of Economics.
  12. Martha Banbura & Domenico Giannone & Lucrezia Reichlin, 2008. "Large Bayesian VARs," Working Papers ECARES, ULB -- Universite Libre de Bruxelles 2008_033, ULB -- Universite Libre de Bruxelles.
  13. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 39(3), pages 433-448, August.
  14. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago WP-97-18, Federal Reserve Bank of Chicago.
  15. Canova, Fabio, 1991. "The Sources of Financial Crisis: Pre- and Post-Fed Evidence," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 32(3), pages 689-713, August.
  16. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  17. Kadiyala, K Rao & Karlsson, Sune, 1997. "Numerical Methods for Estimation and Inference in Bayesian VAR-Models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 12(2), pages 99-132, March-Apr.
  18. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  19. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper, Tilburg University, Center for Economic Research 1999-28, Tilburg University, Center for Economic Research.
  20. Christopher A. Sims & Tao Zha, 1996. "Bayesian methods for dynamic multivariate models," Working Paper, Federal Reserve Bank of Atlanta 96-13, Federal Reserve Bank of Atlanta.
  21. Giannone, Domenico & Lenza, Michele & Primiceri, Giorgio E, 2012. "Prior Selection for Vector Autoregressions," CEPR Discussion Papers, C.E.P.R. Discussion Papers 8755, C.E.P.R. Discussion Papers.
  22. Forni, Mario & Giannone, Domenico & Lippi, Marco & Reichlin, Lucrezia, 2007. "Opening the black box: structural factor models with large cross-sections," Working Paper Series, European Central Bank 0712, European Central Bank.
  23. Sylvia Kaufmann & Maria Teresa Valderrama, 2010. "The Role Of Credit Aggregates And Asset Prices In The Transmission Mechanism: A Comparison Between The Euro Area And The Usa," Manchester School, University of Manchester, vol. 78(4), pages 345-377, 07.
  24. Lee, Jaewoo & Chinn, Menzie D., 2006. "Current account and real exchange rate dynamics in the G7 countries," Journal of International Money and Finance, Elsevier, Elsevier, vol. 25(2), pages 257-274, March.
  25. Gary M. Koop, 2013. "Forecasting with Medium and Large Bayesian VARS," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 28(2), pages 177-203, 03.
  26. International Monetary Fund, 2005. "Net Foreign Asset Positions and Consumption Dynamics in the International Economy," IMF Working Papers 05/82, International Monetary Fund.
  27. Pesaran, M. Hashem & Schuermann, Til & Smith, L. Vanessa, 2009. "Forecasting economic and financial variables with global VARs," International Journal of Forecasting, Elsevier, Elsevier, vol. 25(4), pages 642-675, October.
  28. James H. Stock & Mark W. Watson, 2001. "Vector Autoregressions," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 101-115, Fall.
  29. Mishkin, Frederic S., 1978. "The Household Balance Sheet and the Great Depression," The Journal of Economic History, Cambridge University Press, Cambridge University Press, vol. 38(04), pages 918-937, December.
  30. Jeremy C. Stein & Anil K. Kashyap, 2000. "What Do a Million Observations on Banks Say about the Transmission of Monetary Policy?," American Economic Review, American Economic Association, American Economic Association, vol. 90(3), pages 407-428, June.
  31. Gertler, M. & Gilchrist, S., 1993. "Monetary Policy, Business Cycles and the Behavior of Small Manufacturing Firms," Working Papers, C.V. Starr Center for Applied Economics, New York University 93-02, C.V. Starr Center for Applied Economics, New York University.
  32. Chris Bloor & Troy Matheson, 2009. "Real-time conditional forecasts with Bayesian VARs: An application to New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2009/02, Reserve Bank of New Zealand.
  33. Frederic S. Mishkin, 1995. "Symposium on the Monetary Transmission Mechanism," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 3-10, Fall.
  34. Ben Bernanke & Jean Boivin & Piotr S. Eliasz, 2005. "Measuring the Effects of Monetary Policy: A Factor-augmented Vector Autoregressive (FAVAR) Approach," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 120(1), pages 387-422, January.
  35. Lane, Philip R. & Milesi-Ferretti, Gian Maria, 2006. "The External Wealth of Nations Mark II: Revised and Extended Estimates of Foreign Assets and Liabilities, 1970-2004," CEPR Discussion Papers, C.E.P.R. Discussion Papers 5644, C.E.P.R. Discussion Papers.
  36. Iacoviello, Matteo & Minetti, Raoul, 2008. "The credit channel of monetary policy: Evidence from the housing market," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(1), pages 69-96, March.
  37. James H. Stock & Mark W. Watson, 2005. "Implications of Dynamic Factor Models for VAR Analysis," NBER Working Papers 11467, National Bureau of Economic Research, Inc.
  38. Kenneth Beauchemin & Saeed Zaman, 2011. "A medium scale forecasting model for monetary policy," Working Paper 1128, Federal Reserve Bank of Cleveland.
  39. Bernanke, Ben S. & Boivin, Jean, 2003. "Monetary policy in a data-rich environment," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 525-546, April.
  40. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1011, Cowles Foundation for Research in Economics, Yale University.
  41. Fratzscher, Marcel & Saborowski, Christian & Straub, Roland, 2009. "Monetary Policy Shocks and Portfolio Choice," Working Paper Series, European Central Bank 1122, European Central Bank.
  42. Uluc Aysun & Sami Alpanda, 2011. "Global banking and the balance sheet channel of monetary transmission," Working Papers, University of Central Florida, Department of Economics 2011-04, University of Central Florida, Department of Economics.
  43. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(3), pages 869-902, August.
  44. Domenico Giannone & Michèle Lenza & Lucrezia Reichlin, . "Explaining the great moderation: it is not the shocks," ULB Institutional Repository 2013/6413, ULB -- Universite Libre de Bruxelles.
  45. David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper, Federal Reserve Bank of Atlanta 92-13, Federal Reserve Bank of Atlanta.
  46. Stock, James H & Watson, Mark W, 2002. "Macroeconomic Forecasting Using Diffusion Indexes," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 20(2), pages 147-62, April.
  47. Chatelain, Jean-Bernard & Generale, Andrea & Hernando, Ignacio & Von Kalckreuth, Ulf & Vermeulen, Philip, 2001. "Firm investment and monetary transmission in the euro area," Working Paper Series, European Central Bank 0112, European Central Bank.
  48. Faust, Jon & Rogers, John H., 2003. "Monetary policy's role in exchange rate behavior," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(7), pages 1403-1424, October.
  49. Kim, Soyoung, 2001. "International transmission of U.S. monetary policy shocks: Evidence from VAR's," Journal of Monetary Economics, Elsevier, Elsevier, vol. 48(2), pages 339-372, October.
  50. Mark Gertler & Simon Gilchrist, 1993. "The role of credit market imperfections in the monetary transmission mechanism: arguments and evidence," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 93-5, Board of Governors of the Federal Reserve System (U.S.).
  51. Scholl, Almuth & Uhlig, Harald, 2008. "New evidence on the puzzles: Results from agnostic identification on monetary policy and exchange rates," Journal of International Economics, Elsevier, Elsevier, vol. 76(1), pages 1-13, September.
  52. Koop, Gary, 2011. "Forecasting with Medium and Large Bayesian VARs," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2011-38, Scottish Institute for Research in Economics (SIRE).
  53. John C. Robertson & Ellis W. Tallman, 1999. "Vector autoregressions: forecasting and reality," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 4-18.
Full references (including those not matched with items on IDEAS)

Citations

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:feddgw:170. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Amy Chapman).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.