Hostname: page-component-586b7cd67f-t7fkt Total loading time: 0 Render date: 2024-11-28T05:53:03.776Z Has data issue: false hasContentIssue false
  • English
  • Français

THE CONVENTIONAL MONETARY POLICY AND TERM STRUCTURE OF INTEREST RATES DURING THE FINANCIAL CRISIS

Published online by Cambridge University Press:  17 July 2017

Tolga Cenesizoglu ,
Denis Larocque  and
Michel Normandin
Tolga Cenesizoglu*
Affiliation:
Alliance Manchester Business School and HEC Montréal
Denis Larocque
Affiliation:
HEC Montréal
Michel Normandin
Affiliation:
HEC Montréal
*
Address correspondence to: Tolga Cenesizoglu, Alliance Manchester Business School and HEC Montréal, 3000 Chemin de la Côte-Sainte-Catherine, Montreal, H3T 2A7, QC, CANADA; e-mail: [email protected].
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper analyzes whether the Fed had the ability through its conventional monetary policy to affect key economic and financial variables, and, in particular, the term structure of interest rates, during the recent financial crisis. This departs from the empirical literature that focuses mainly on the effectiveness of unconventional monetary policies during this episode, although these policies are appropriate only to the extent that the conventional policy was ineffective in the first place. Our identification strategy based on the conditional heteroskedasticity of the structural innovations allows us to specify a flexible structural vector auto-regressive process that relaxes the identifying assumptions commonly used in earlier studies. Comparing our results obtained from samples excluding and including the financial crisis, we find that the conventional monetary policy has lost its effectiveness shortly after the beginning of the financial turmoil. This result suggests that the Fed's use of unconventional policies was appropriate, at least, with the objective of changing the term structure of interest rates.

Keywords

Conventional Monetary PolicyTerm Structure of Interest RatesStructural Vector Auto-RegressionConditional HeteroskedasticityFinancial Crisis
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 8 , December 2018 , pp. 2032 - 2069
Copyright
Copyright © Cambridge University Press 2017 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

REFERENCES

Abbassi, P. and Linzert, T. (2011) The Effectiveness of Monetary Policy in Steering Money Market Rates During the Recent Financial Crisis. European Central Bank working paper no. 1328.Google Scholar
Ang, A., Boivin, J., Dong, S., and Loo-Kung, R. (2011) Monetary policy shifts and the term structure. Review of Economic Studies 78, 429–457.Google Scholar
Ang, A. and Piazzesi, M. (2003) A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables. Journal of Monetary Economics 50, 745–787.Google Scholar
Bernanke, B. (2009) The Crisis and the Policy Response. Stamp Lecture, London School of Economics, London, England.Google Scholar
Bernanke, B., Gertler, M., and Watson, M. (1997) Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity 1, 91–142.Google Scholar
Bernanke, B. and Mihov, I. (1998) Measuring monetary policy. Quarterly Journal of Economics 113, 869–902.Google Scholar
Board of Governors of the Federal Reserve System (1994) The Federal Reserve System: Purposes and Functions. Washington, DC: Board of Governors of the Federal Reserve System.Google Scholar
Board of Governors of the Federal Reserve System (2008) Minutes of the Federal Open Market Committee. October 28–29.Google Scholar
Borio, C. and Disyatat, P. (2009) Unconventional Monetary Policies: An Appraisal. BIS working paper no. 292.Google Scholar
Bouakez, H. and Normandin, M. (2010) Fluctuations in the foreign exchange market: How important are monetary policy shocks? Journal of International Economics 81, 139–153.Google Scholar
Calomiris, C. W. (2009) The subprime turmoil: What's old, what's new, and what's next. Journal of Structured Finance 15, 6–52.Google Scholar
Campbell, J. and Ammer, J. (1993) What moves the stock and bond markets? A variance decomposition for long-term asset returns. Journal of Finance 48, 3–37.Google Scholar
Carpenter, S. and Demiralp, S. (2008) The liquidity effect in the federal funds market: Evidence at the monthly frequency. Journal of Money, Credit and Banking 40, 1–24.Google Scholar
Cecioni, M., Ferrero, G., and Secchi, A. (2011) Unconventional Monetary Policy in Theory and in Practice. Bank of Italy working paper no. 102.Google Scholar
Christensen, J. H. E., Lopez, J. A., and Rudebusch, G. D. (2009) Do Central Bank Liquidity Facilities Affect Interbank Lending Rates? Federal Reserve Bank of San Francisco working paper 2009–13.Google Scholar
Christiano, L. J. (1995) Commentary on Pagan and Robertson. Federal Reserve Bank of St. Louis Review 77, 55–61.Google Scholar
Christiano, L. J., Eichenbaum, M., and Evans, C. L. (1999) Monetary policy shocks: What have we learned and to what end? In Taylor, John B. and Woodford, Michael (eds.), Handbook of Macroeconomics, vol. 1A, pp. 65–148. Amsterdam: Elsevier.Google Scholar
Claessens, S., Dell'Ariccia, G., Igan, D., and Laeven, L. (2010) Cross-country experiences and policy implications from the global financial crisis. Economic Policy 25, 267–293.Google Scholar
Cook, T. and Hahn, T. (1989) The effect of changes in the Federal funds rate target on market interest rates in the 1970s. Journal of Monetary Economics 24, 331–351.Google Scholar
Diebold, F. and Li, C. (2006) Forecasting the term structure of government bond yields. Journal of Econometrics 130, 337–364.Google Scholar
Duygan-Bump, B., Parkinson, P., Rosengren, E., Suarez, G. A., and Willen, P. (2013) How effective were the Federal Reserve emergency liquidity facilities? Evidence from the asset-backed commercial paper money market mutual fund liquidity facility. Journal of Finance 68, 715–737.Google Scholar
Ehrmann, M., Fratzscher, M., and Rigobon, R. (2011) Stocks, bonds, money markets and exchange rates: Measuring international financial transmission. Journal of Applied Econometrics 26, 948–974.Google Scholar
Eichenbaum, M. and Evans, C. L. (1995) Some empirical evidence on the effects of shocks to monetary policy on exchange rates. Quarterly Journal of Economics 110, 975–1009.Google Scholar
Evans, C. and Marshall, D. (1998) Monetary policy and the term structure of nominal interest rates: Evidence and theory. Carnegie-Rochester Conference Volume on Public Policy 49, 53–111.Google Scholar
Gilli, M., Große, S., and Schumann, E. (2010) Calibrating the Nelson-Siegel-Svensson Model. Comisef working paper series WPS-031.Google Scholar
Kim, S. and Roubini, N. (2000) Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach. Journal of Monetary Economics 45, 561–586.Google Scholar
Krugman, P. (2008) Depression economics returns. New York Times, November 14, 2008.Google Scholar
Kuttner, K. N. (2001) Monetary policy surprises and interest rates: Evidence from the fed funds futures market. Journal of Monetary Economics 47 (3), 523–544.Google Scholar
Lanne, M. and Lutkepohl, H. (2008) Identifying monetary policy shocks via changes in volatility. Journal of Money, Credit and Banking 40, 1131–1149.Google Scholar
Lanne, M., Lutkepohl, H., and Maciejowska, K. (2010) Structural vector autoregressions with Markov switching. Journal of Economic Dynamics and Control 34, 121–131.Google Scholar
Leeper, E., Sims, C., and Zha, T. (1996) What does monetary policy do. Brookings Papers on Economic Activity 2, 1–63.Google Scholar
Lütkepohl, H. (2012) Identifying Structural Vector Autoregressions Via Changes in Volatility. DIW discussion paper 1259.Google Scholar
Mankiw, N. G. and Ball, L. (2010) Macroeconomics and the Financial System. New York: Macmillan.Google Scholar
McLachlan, G. J. (1987) On bootstrapping the likelihood ratio test stastistic for the number of components in a normal mixture. Journal of the Royal Statistical Society. Series C (Applied Statistics) 36, 318–324.Google Scholar
Medeiros, C. and Rodriguez, M. (2011) The Dynamics of the Term Structure of Interest Rates in the United States in Light of the Financial Crisis of 2007–10. International Monetary Fund working paper WP/11/84.Google Scholar
Milunovich, G. and Yang, M. (2013) On identifying structural VAR models via ARCH effects. Journal of Time Series Econometrics 5, 117–131.Google Scholar
Mishkin, F. (2009) Is monetary policy effective during financial crises? American Economic Review 99, 573–577.Google Scholar
Normandin, M. and Phaneuf, L. (2004) Monetary policy shocks: Testing identification conditions under time-varying conditional volatility. Journal of Monetary Economics 51, 1217–1243.Google Scholar
Pagan, A. R. and Robertson, J. C. (1995) Resolving the liquidity effect. Federal Reserve Bank of St. Louis Review 77, 33–54.Google Scholar
Pascual, L., Romo, J., and Ruiz, E. (2006) Bootstrap prediction for returns and volatilities in garch models. Computational Statistics and Data Analysis 50, 2293–2312.Google Scholar
Rigobon, R. (2003) Identification through heteroskedasticity. Review of Economics and Statistics 85, 777–792.Google Scholar
Roley, V. and Sellon, G. (1995) Monetary policy actions and long term interest rates. Federal Reserve Bank of Kansas City Economic Quarterly 80, 77–89.Google Scholar
Roush, J. (2007) The expectations theory works for monetary policy shocks. Journal of Monetary Economics 54, 1631–1643.Google Scholar
Sentana, E. and Fiorentini, G. (2001) Identification, estimation and testing of conditionally heteroskedastic factor models. Journal of Econometrics 102, 143–164.Google Scholar
Sims, C. A. (1992) Interpreting the macroeconomic time series facts: The effects of monetary policy. European Economic Review 36, 975–1000.Google Scholar
Sims, C. A., Stock, J. H., and Watson, M. W. (1990) Inference in linear time series models with some unit roots. Econometrica 58, 113–144.Google Scholar
Smith, J. and Taylor, J. (2010) The term structure of policy rules. Journal of Monetary Economics 56, 907–917.Google Scholar
Stroebel, J. C. and Taylor, J. B. (2009) Estimated Impact of the Feds Mortgage-Backed Securities Purchase Program. NBER working paper 15626.Google Scholar
Strongin, S. (1995) The identification of monetary policy disturbances: Explaining the liquidity puzzle. Journal of Monetary Economics 35, 463–498.Google Scholar
Taylor, J. B. and Williams, J. C. (2009) A black swan in the money market. American Economic Journal: Macroeconomics 1, 58–83.Google Scholar
Thornton, D. L. (2001) The Federal Reserve's operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect. Journal of Banking and Finance 25, 1717–1739.Google Scholar
Thornton, D. L. (2011) The effectiveness of unconventional monetary policy: The term auction facility. Federal Reserve Bank of St. Louis Review 93, 439–453.Google Scholar
Vilasuso, J. (1999) The liquidity effect and the operating procedure of the Federal Reserve. Journal of Macroeconomics 21, 443–461.Google Scholar
Waggoner, D. F. and Zha, T. (2003) Likelihood preserving normalization in multiple equation models. Journal of Econometrics 114, 329–347.Google Scholar
Wu, T. (2011) The U.S. money market and the term auction facility in the financial crisis of 2007-2009. Review of Economics and Statistics 93, 617–631.Google Scholar