Monetary policy and financial market developments in the US

H Social Sciences (General);HB Economic Theory;HG Finance

Zekaite, Zivile ; Kontonikas, Alexandros

University:University of Glasgow

Department:Adam Smith Business School

关键词: Monetary policy, asset prices, monetary policy rule, financial stress.;   

Others  :  http://theses.gla.ac.uk/8150/7/thesis_coversheet.pdf

来源: University of Glasgow

【 摘 要 】

Over the past decade, monetary policy has been in the spotlight as one of the keydrivers of the real economy due to its aggressive response to the global financial crisis of2007 - 2009. This has revived the debate of the late 1990s regarding the role of asset pricesin policy decision making and has renewed interest in the impact of monetary policy onfinancial markets. Therefore, the focus of this thesis is the relationship between monetarypolicy conduct and financial market developments in the United States (US) over theperiod spanning the Great Moderation, the global financial crisis and its aftermath. Threeempirical chapters analyse different aspects of monetary policy interaction with financialmarkets using alternative methodologies.The first empirical chapter provides a comprehensive study of conventionalmonetary policy in the US. It investigates the Federal Reserve’s response to financialmarket stress during the Great Moderation and the part of the global financial crisis byaddressing two main questions. Firstly, does the Federal Reserve (Fed) react directly to theindicators of financial stress and, if so, is such reaction symmetric? Secondly, does thepolicy response to inflation and output gap change in light of financial turmoil? Thesequestions are examined with respect to the four different dimensions of financial marketstress: credit risk, stock market liquidity risk, stock market bear conditions and pooroverall financial conditions. In addition, the analysis separately evaluates the impact of thelatest crisis on US monetary policy. The results indicate the direct policy reaction todevelopments in the stock market price index, an interest rate spread, the measure of stockmarket liquidity and broad financial conditions that is found to be strongly dependent onthe business cycle. Financial market developments have much more weight on the Fed’sdecisions during economic recessions as compared to economic expansions. Furthermore,in times of elevated financial distress, the Fed’s reaction to inflation declines to someextent, while the output gap parameter becomes statistically insignificant. Nevertheless, thefinding that financial stress implies a lower policy rate appears to be largely driven bymonetary policy actions during the period 2007 - 2008. Thus, the financial crisis has hadimportant implications for US monetary policy.Chapter 2 investigates what explains the variation in unexpected excess returns onthe 2-, 5- and 10-year Treasury bonds and how returns respond to conventional andunconventional monetary policy in the period spanning the Great Moderation, the recentfinancial crisis and its aftermath. In addition, unexpected excess returns are decomposedinto three components related to the revisions in rational market expectations (news) aboutfuture excess returns, inflation and real interest rates to identify the sources of the bondmarket response to monetary policy. The main findings imply that news about futureinflation is the key factor in explaining the variability of unexpected excess Treasury bondreturns across the maturities. Regarding the effect of conventional and unconventionalmonetary policy actions, monetary easing is generally associated with higher unexpectedexcess Treasury bond returns. Furthermore, the results highlight the importance of theinflation news component in explaining the reaction of the bond market to monetarypolicy. The positive effect of monetary easing on unexpected excess Treasury bond returnsis largely explained by the corresponding negative effect on inflation expectations.Nevertheless, the bond market reaction to conventional policy shocks has grown weakerover the more recent period, perhaps reflecting changes in the implementation andcommunication of the Fed’s policy since the middle 1990s. Meanwhile, the results withrespect to unconventional monetary policy are driven to a great extent by the peak of thefinancial crisis in autumn of 2008.Finally, Chapter 3 aims to revisit the role of conventional Fed’s policy inexplaining the size and value stock return anomalies, while taking fully into account the bidirectionalrelationship between monetary policy and real stock prices. As interest rate-basedpolicy is of main interest here, the sample period ends prior to the crisis in 2007. Theresults confirm a strong, negative and significant monetary policy tightening effect on realstock prices at both aggregate and disaggregate (portfolio) levels. Furthermore, there is theevidence of the “delayed size effect” of monetary policy actions. Following acontractionary monetary policy shock, an immediate decline in stock prices of large firmsis more pronounced as compared to small firms. However, large stocks recover to a greatextent in the second period after the shock, while small stocks drop sharply. Meanwhile,the findings overall are not very supportive of the differential impact of monetary policy onvalue versus growth stocks as predicted by the credit channel. Finally, the results do notindicate the strong Fed’s reaction to stock price developments.