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The Effects of Conventional and Unconventional Monetary Policy: A New Approach

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  • Atsushi Inoue
  • Barbara Rossi

Abstract

We propose a new approach to analyze economic shocks. Our new procedure identifies economic shocks as exogenous shifts in a function; hence, we call the "functional shocks". We show how to identify such shocks and how to trace their effects in the economy via VARs using a procedure that we call "VARs with functional shocks". Using our new procedure, we address the crucial question of studying the effects or monetary policy by identifying monetary policy shocks as shifts in the whole term structure of government bond yields in a narrow window of time around monetary policy announcements. Our identification sheds new light on the effects of monetary policy shocks, both in conventional and unconventional periods, and shows that traditional identification procedures may miss important effects. We find that, overall, unconventional monetary policy has similar effects to conventional expansionary monetary policy, leading to an increase in both output growth and inflation; the response is hump-shaped; peaking around one year to one year and a half after the shock. The new procedure has the advantage of identifying monetary policy shocks during both conventional and unconventional monetary policy periods in a unified manner and can be applied more generally to other economic shocks.

Suggested Citation

  • Atsushi Inoue & Barbara Rossi, 2019. "The Effects of Conventional and Unconventional Monetary Policy: A New Approach," Working Papers 1082, Barcelona Graduate School of Economics.
  • Handle: RePEc:bge:wpaper:1082
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    References listed on IDEAS

    as
    1. Gurkaynak, Refet S. & Sack, Brian T. & Swanson, Eric P., 2007. "Market-Based Measures of Monetary Policy Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 201-212, April.
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    11. Christiane Baumeister & Luca Benati, 2013. "Unconventional Monetary Policy and the Great Recession: Estimating the Macroeconomic Effects of a Spread Compression at the Zero Lower Bound," International Journal of Central Banking, International Journal of Central Banking, vol. 9(2), pages 165-212, June.
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    Citations

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    Cited by:

    1. Chunya Bu & John Rogers & Wenbin Wu, 2019. "A Unified Measure of Fed Monetary Policy Shocks," Finance and Economics Discussion Series 2019-043, Board of Governors of the Federal Reserve System (US).
    2. Rasmus Fatum & Naoko Hara & Yohei Yamamoto, 2019. "Negative Interest Rate Policy and the Influence of Macroeconomic News on Yields," IMES Discussion Paper Series 19-E-02, Institute for Monetary and Economic Studies, Bank of Japan.
    3. Lewis, Daniel J., 2019. "Announcement-Specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects," Staff Reports 891, Federal Reserve Bank of New York.

    More about this item

    Keywords

    shock identification; VARs; zero-lower bound; unconventional monetary policy; forward guidance;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • I3 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty
    • D1 - Microeconomics - - Household Behavior

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