Abstract
We specify unconventional monetary policy reaction functions for the Fed using linear and nonlinear econometric frameworks. We find that nonstandard policy measures are largely driven by the dynamics of inflation and the output gap, with the effect being particularly strong during QE rounds. Moreover, we uncover the presence of asymmetry and regime dependence in central bank’s actions since the global financial crisis, especially concerning the response of the term spread and the shadow short rate to the growth rate of central bank reserves. From a policy perspective and given the lack of a systematic response of monetary policy to asset price growth in nonstandard times, our findings seem to corroborate the view that concerns about asset price bubbles, financial sector pro-cyclicality and systemic risk should be part of the macro-prudential policy toolkit.
Funding source: Foundation for Science and Technology
Award Identifier / Grant number: UID/ECO/03182/2019
Funding statement: AMSE is financed by French National Research Agency grant ANR-17-EURE-0020. NIPE is financed by National Funds of the FCT – Portuguese Foundation for Science and Technology within the project “UID/ECO/03182/2019”.
Acknowledgements
We are grateful to the Editor, Bruce Mizrach, and two anonymous referees, to participants to the 2nd Annual Conference of the Society for Economic Measurement (SEM, Paris) and the 16th Annual Conference of the European Economics and Finance Society (EEFS) for their constructive comments and suggestions that considerably helped us to improved this paper.
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