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Does the Fed's unconventional monetary policy weaken the link between the financial and the real sector?

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  • Yimin Xu
  • Jakob de Haan

Abstract

After the global financial crisis, several central banks introduced unconventional monetary policies, such as QE. If QE increases asset prices, but does not boost the real economy to the same extent, the relationship between the financial and the real sector will weaken. This study investigates this issue for the US using the predictive power of the credit spread for future employment growth as measure for the strength of the real-financial link in a moving-window framework. Our results suggest that the real-financial link is lower during bubbles and recessions. We also find that the relationship weakened after the Fed introduced QE.

Suggested Citation

  • Yimin Xu & Jakob de Haan, 2016. "Does the Fed's unconventional monetary policy weaken the link between the financial and the real sector?," DNB Working Papers 529, Netherlands Central Bank, Research Department.
  • Handle: RePEc:dnb:dnbwpp:529
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    References listed on IDEAS

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    More about this item

    Keywords

    Financial-real Linkages; unconventional monetary policies; QE; Federal Reserve;

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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