[PPT] - The Global Effects of U.S. Monetary Policy Riccardo Degasperi 1 Simon PowerPoint Presentation

SLIDE 1

The Global Effects of U.S. Monetary Policy

Riccardo Degasperi 1 Simon Hong 2 Giovanni Ricco 3

1University of Warwick 2University of Warwick 3University of Warwick, CEPR and OFCE-SciencesPo

Annual Conference Chaire Banque de France 23 September 2019, Paris

SLIDE 2

Spillovers from US Monetary Policy?

How Does U.S. MP Affect the Rest of the World?

◮ Exchange Rate Channel ◮ Demand Channel ◮ Financial Channels – ‘Risk Taking’ Channel, ‘Credit’ Channel

Implications:

◮ Dilemma vs Trilemma / Monetary Sovereignty ◮ Global Financial Cycle ◮ Policy spillovers / Policy Coordinations / Currencies Wars

Important question ... yet limited empirical literature!

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SLIDE 3

What do we know?

Paper Countries Identification CPI IP/GDP Short-term rates Dedola et al. (2018) 18 EME, 18 AE Sign restriction − − AE: −; EME: mixed Iacoviello, Navarro (2019) 50 countries Cholesky na − + Kim (2001) G7 Cholesky insign. − + Canova (2005) Latin America Sign restriction + mixed + Mackowiak (2007) EME Sign restriction + mixed + Miniane, Rogers (2007) 26 countries Zero restrictions −∗ − + Di Giovanni, Shambaugh (2008) IFS countries none na − for peggers na Bluedorn, Bowdler (2011) AE Romer and Romer −∗ −∗ + Akinci (2013) 6/10 EME panel VAR + Cholesky na −∗ na Rey (2015) UK, CAN, SWE, NZ IV SVAR mixed mixed mixed Passari, Rey (2015) UK IV SVAR insign. insign. insign. Georgiadis (2016) EME and AE Sign restriction na − na Bhattarai et al. (2017) 15 EME Cholesky insign. − + Vicondoa (2019) 13 EME Cholesky + − + Miranda-Agrippino, Rey (2019) US, EU, UK IV SVAR − − −

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SLIDE 4

What do we know?

Paper Countries Identification CPI IP/GDP Short-term rates Dedola et al. (2018) 18 EME, 18 AE Sign restriction − − AE: −; EME: mixed Iacoviello, Navarro (2019) 50 countries Cholesky na − + Kim (2001) G7 Cholesky insign. − + Canova (2005) Latin America Sign restriction + mixed + Mackowiak (2007) EME Sign restriction + mixed + Miniane, Rogers (2007) 26 countries Zero restrictions −∗ − + Di Giovanni, Shambaugh (2008) IFS countries none na − for peggers na Bluedorn, Bowdler (2011) AE Romer and Romer −∗ −∗ + Akinci (2013) 6/10 EME panel VAR + Cholesky na −∗ na Rey (2015) UK, CAN, SWE, NZ IV SVAR mixed mixed mixed Passari, Rey (2015) UK IV SVAR insign. insign. insign. Georgiadis (2016) EME and AE Sign restriction na − na Bhattarai et al. (2017) 15 EME Cholesky insign. − + Vicondoa (2019) 13 EME Cholesky + − + Miranda-Agrippino, Rey (2019) US, EU, UK IV SVAR − − −

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SLIDE 5

What do we know?

Paper Countries Identification CPI IP/GDP Short-term rates Dedola et al. (2018) 18 EME, 18 AE Sign restriction − − AE: −; EME: mixed Iacoviello, Navarro (2019) 50 countries Cholesky na − + Kim (2001) G7 Cholesky insign. − + Canova (2005) Latin America Sign restriction + mixed + Mackowiak (2007) EME Sign restriction + mixed + Miniane, Rogers (2007) 26 countries Zero restrictions −∗ − + Di Giovanni, Shambaugh (2008) IFS countries none na − for peggers na Bluedorn, Bowdler (2011) AE Romer and Romer −∗ −∗ + Akinci (2013) 6/10 EME panel VAR + Cholesky na −∗ na Rey (2015) UK, CAN, SWE, NZ IV SVAR mixed mixed mixed Passari, Rey (2015) UK IV SVAR insign. insign. insign. Georgiadis (2016) EME and AE Sign restriction na − na Bhattarai et al. (2017) 15 EME Cholesky insign. − + Vicondoa (2019) 13 EME Cholesky + − + Miranda-Agrippino, Rey (2019) US, EU, UK IV SVAR − − −

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SLIDE 6

Challenges to Measuring US MP Global Spillovers

Bernanke, Mundell-Fleming Lecture (2015)

1. Policy actions are a signal about US and global fundamentals
2. Large heterogeneity across countries both in terms of cyclical position,

financial markets conditions and ‘structural features’

3. Need of high frequency data on leverage, risk appetite, capital flows, ...
:

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SLIDE 7

Challenges to Measuring US MP Global Spillovers

Bernanke, Mundell-Fleming Lecture (2015)

1. Policy actions are a signal about US and global fundamentals
2. Large heterogeneity across countries both in terms of cyclical position,

financial markets conditions and ‘structural features’

3. Need of high frequency data on leverage, risk appetite, capital flows, ...
4. Potential misspecifications, nonlinearities and asymmetries
:

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SLIDE 8

Challenges to Measuring US MP Global Spillovers

Our Approach

1. Policy actions are a signal about US and global fundamentals

= ⇒ High Frequency Identification for conventional MP shocks ... = ⇒ ... robust to signalling effects of MP actions

2. Large heterogeneity across countries both in terms of cyclical position,

financial markets conditions and ‘structural features’

3. Need of high frequency data on leverage, risk appetite, capital flows, ...
4. Potential misspecifications, nonlinearities and asymmetries
:

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SLIDE 9

Challenges to Measuring US MP Global Spillovers

Our Approach

1. Policy actions are a signal about US and global fundamentals

= ⇒ High Frequency Identification for conventional MP shocks ... = ⇒ ... robust to signalling effects of MP actions

2. Large heterogeneity across countries both in terms of cyclical position,

financial markets conditions and ‘structural features’

= ⇒ Rich monthly dataset of 15 ADV and 15 EME = ⇒ Efficient big data techniques with bilateral Large BVARs = ⇒ Global macro and financial aggregates

3. Need of high frequency data on leverage, risk appetite, capital flows, ...
4. Potential misspecifications, nonlinearities and asymmetries
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SLIDE 10

Challenges to Measuring US MP Global Spillovers

Our Approach

1. Policy actions are a signal about US and global fundamentals

= ⇒ High Frequency Identification for conventional MP shocks ... = ⇒ ... robust to signalling effects of MP actions

2. Large heterogeneity across countries both in terms of cyclical position,

financial markets conditions and ‘structural features’

= ⇒ Rich monthly dataset of 15 ADV and 15 EME = ⇒ Efficient big data techniques with bilateral Large BVARs = ⇒ Global macro and financial aggregates

3. Need of high frequency data on leverage, risk appetite, capital flows, ...

= ⇒ Dataset of financial conditions indexes (CBC Global Liquidity dataset)

CBC Data

4. Potential misspecifications, nonlinearities and asymmetries
:

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SLIDE 11

Challenges to Measuring US MP Global Spillovers

Our Approach

1. Policy actions are a signal about US and global fundamentals

= ⇒ High Frequency Identification for conventional MP shocks ... = ⇒ ... robust to signalling effects of MP actions

2. Large heterogeneity across countries both in terms of cyclical position,

financial markets conditions and ‘structural features’

= ⇒ Rich monthly dataset of 15 ADV and 15 EME = ⇒ Efficient big data techniques with bilateral Large BVARs = ⇒ Global macro and financial aggregates

3. Need of high frequency data on leverage, risk appetite, capital flows, ...

= ⇒ Dataset of financial conditions indexes (CBC Global Liquidity dataset)

CBC Data

4. Potential misspecifications, nonlinearities and asymmetries

= ⇒ Bayesian Local Projections and direct study of asymmetries

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SLIDE 12

Our Results

◮ Strong nominal effects ◮ Sizeable real effects ◮ Global response of capital flows and risk appetite ◮ Oil and commodities play an important role in CPI movements ◮ Some evidence of asymmetric effects

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SLIDE 13

Related Literature

⊲ HF Identification MP Shocks: Rudebush (1989), Kuttner (2001), Gürkaynak et al (2005), Gertler and Karadi (2015), Caldara and Herbst (2016), Jarociński and Karadi (2018), Cieslak and Schrimpf (2018), Andrade and Ferroni (2016), Miranda-Agrippino and Ricco (2015) ⊲ Global Effects US MP: Kim (2001), Canova (2005), Mackowiak (2007), Miniane, Rogers (2007), Di Giovanni, Shambaugh (2008), Bluedorn, Bowdler (2011), Akinci (2013), Miranda-Agrippino, Rey (2019), Rey (2015, 2016), Passari, Georgiadis (2016), Bhattarai et al. (2017), Gerko and Rey (2017), Stravakeva and Tang (2018), Dedola et al. (2018), Iacoviello, Navarro (2019), Vicondoa (2019), Gilchrist et al. (2019), Kalemli-Özcan (2019) ⊲ Spillovers through Banks: Correa and Murry (2009), Cetorelli and Goldberg (2012), Temesvary et al. (2017), Correa et al. (2015), Buch et al. (2018), International Banking Research Network (IBRN) ⊲ Dominant Currency: Gourinchas and Rey (2007), Rey (2015), Bernanke (2015), Casas et

al. (2017), Gourinchas et al (2017)
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SLIDE 14

The Identification of US MP Shocks

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SLIDE 15

The HFI of Monetary Policy Shocks

Kuttner (2001), Sack (2004), Gürkaynak, Sack, Swanson (2005)

◮ Interest rates futures for agents’

expectations p(h)

t

= Et (it+h) + ζ(h)

t

:

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SLIDE 16

The HFI of Monetary Policy Shocks

Kuttner (2001), Sack (2004), Gürkaynak, Sack, Swanson (2005)

◮ Interest rates futures for agents’

expectations p(h)

t

= Et (it+h) + ζ(h)

t

◮ Revision in 30 min window price

around announcements

8AM 10AM 12PM 2PM 4PM 5.92 5.94 5.96 5.98 6 6.02 6.04 % points trading hours

SSF Dec1999 [M0]

:

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SLIDE 17

The HFI of Monetary Policy Shocks

Kuttner (2001), Sack (2004), Gürkaynak, Sack, Swanson (2005)

◮ Interest rates futures for agents’

expectations p(h)

t

= Et (it+h) + ζ(h)

t

◮ Revision in 30 min window price

around announcements

8AM 10AM 12PM 2PM 4PM 5.92 5.94 5.96 5.98 6 6.02 6.04 % points trading hours

SSF Dec1999 [M0]

:

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SLIDE 18

The HFI of Monetary Policy Shocks

Kuttner (2001), Sack (2004), Gürkaynak, Sack, Swanson (2005)

◮ Interest rates futures for agents’

expectations p(h)

t

= Et (it+h) + ζ(h)

t

◮ Revision in 30 min window price

around announcements

8AM 10AM 12PM 2PM 4PM 5.92 5.94 5.96 5.98 6 6.02 6.04 % points trading hours

SSF Dec1999 [M0]

:

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SLIDE 19

The HFI of Monetary Policy Shocks

Kuttner (2001), Sack (2004), Gürkaynak, Sack, Swanson (2005)

◮ Interest rates futures for agents’

expectations p(h)

t

= Et (it+h) + ζ(h)

t

◮ Revision in 30 min window price

around announcements

8AM 10AM 12PM 2PM 4PM 5.92 5.94 5.96 5.98 6 6.02 6.04 % points trading hours

SSF Dec1999 [M0]

:

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SLIDE 20

The HFI of Monetary Policy Shocks

Kuttner (2001), Sack (2004), Gürkaynak, Sack, Swanson (2005)

◮ Interest rates futures for agents’

expectations p(h)

t

= Et (it+h) + ζ(h)

t

◮ Revision in 30 min window price

around announcements = ⇒ MP surprise

8AM 10AM 12PM 2PM 4PM 5.92 5.94 5.96 5.98 6 6.02 6.04 % points trading hours

SSF Dec1999 [M0]

event type: Rate Decision date: 09/12/1999 12:00 new rate: 5.5 (old: 5.5) forecast: 5.5 conflicts: none

Surprise!

:

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SLIDE 21

The HFI of Monetary Policy Shocks

Kuttner (2001), Sack (2004), Gürkaynak, Sack, Swanson (2005)

◮ Interest rates futures for agents’

expectations p(h)

t

= Et (it+h) + ζ(h)

t

◮ Revision in 30 min window price

around announcements

◮ Information or MP shock?

8AM 10AM 12PM 2PM 4PM 5.92 5.94 5.96 5.98 6 6.02 6.04 % points trading hours

SSF Dec1999 [M0]

event type: Rate Decision date: 09/12/1999 12:00 new rate: 5.5 (old: 5.5) forecast: 5.5 conflicts: none

Surprise!

:

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SLIDE 22

The HFI of Monetary Policy Shocks

Kuttner (2001), Sack (2004), Gürkaynak, Sack, Swanson (2005)

◮ Interest rates futures for agents’

expectations p(h)

t

= Et (it+h) + ζ(h)

t

◮ Revision in 30 min window price

around announcements

◮ Information or MP shock?

Interest rate hike

◮ MP shock

= ⇒ lower output and inflation

◮ Endogenous reaction to

demand shocks = ⇒ higher output and inflation

8AM 10AM 12PM 2PM 4PM 5.92 5.94 5.96 5.98 6 6.02 6.04 % points trading hours

SSF Dec1999 [M0]

event type: Rate Decision date: 09/12/1999 12:00 new rate: 5.5 (old: 5.5) forecast: 5.5 conflicts: none

Surprise!

:

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SLIDE 23

An Informationally Robust HFI

Miranda-Agrippino and Ricco (2018)

1. At FOMC frequency =

⇒ Signaling Channel FF4m = α0 +

3

j=−1

θjF cb

t xq+j + 2

j=−1

ϑj

F cb

t xq+j − F cb t−1xq+j

+ MPIm
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SLIDE 24

An Informationally Robust HFI

Miranda-Agrippino and Ricco (2018)

2. Monthly aggregation

MPIt =

m∈t

MPIm

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SLIDE 25

An Informationally Robust HFI

Miranda-Agrippino and Ricco (2018)

3. At monthly frequency =

⇒ Slow Absorption of Information MPIt = φ0 +

12

j=1

φjMPIt−j + MPIt

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SLIDE 26

An Informationally Robust HFI

Miranda-Agrippino and Ricco (2018)

3. At monthly frequency =

⇒ Slow Absorption of Information MPIt = φ0 +

12

j=1

φjMPIt−j + MPIt

1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 percentage points

0.4
0.2

0.2

Market-Based Surprise Monetary Policy Instrument

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SLIDE 27

Information vs MP Shocks

Miranda-Agrippino and Ricco (2018)

Industrial Production

6 12 18 24

% points

2
1

1 2

Unemployment Rate

6 12 18 24

0.8
0.6
0.4
0.2

0.2 0.4 0.6

CPI All

6 12 18 24

0.8
0.6
0.4
0.2

0.2 0.4 0.6

PCE Deflator

6 12 18 24

0.6
0.4
0.2

0.2 0.4 0.6

1Y T-Bond

6 12 18 24 0.5 1

10Y Treasury Rate months

6 12 18 24

0.2

0.2 0.4 0.6 0.8 1 1.2

INFO MPS HFS

:

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SLIDE 28

Large Bayesian VARs

◮ Large Bayesian VAR(12)

◮ 27 variables in global set ◮ 28 variables in advanced set ◮ 28 variables in emerging set

◮ IV-SVAR (Stock and Watson 2012, 2018, Mertens and Ravn 2013) ◮ Standard macro priors (Normal-Inverse-Wishart) ◮ Optimal prior selection (Giannone, Lenza, Primiceri, 2015)

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SLIDE 29

VARs and Local Projections

var-irfs

yt+1 = Byt + ut+1 IRFV AR

h

= BhA−1 ⊲ optimal and consistent only if the VAR captures the DGP

:

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SLIDE 30

VARs and Local Projections

var-irfs

yt+1 = Byt + ut+1 IRFV AR

h

= BhA−1 ⊲ optimal and consistent only if the VAR captures the DGP

lp-irfs

yt+h = B(h)yt + vt+h IRFLP

h

= B(h)A−1 ⊲ robust to misspecification but high estimation uncertainty

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SLIDE 31

VARs and Local Projections

var-irfs

yt+1 = Byt + ut+1 IRFV AR

h

= BhA−1 ⊲ optimal and consistent only if the VAR captures the DGP

lp-irfs

yt+h = B(h)yt + vt+h IRFLP

h

= B(h)A−1 ⊲ robust to misspecification but high estimation uncertainty ⊲ Selecting between the two methods: empirical problem choosing between bias and estimation variance... ⊲ Idea: Regularise LP with NIW priors centred around VAR coefficients (pre-sample)

B(h) ←

→ B(VAR,h) = Bh

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SLIDE 32

Global Spillovers

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SLIDE 33

Domestic Effects of U.S. Monetary Policy (BVAR)

6 12 18 24

4
2

Industrial Production 6 12 18 24

1
0.5

CPI 6 12 18 24

10
5

5 Nominal Stock Price 6 12 18 24

2

2 4 6 Trade Balance 6 12 18 24

2

2 4 6 Nominal Exchange Rate 6 12 18 24

0.2

0.2 0.4 0.6 Long-term Interest Rate 6 12 18 24

80
60
40
20

20 40 US Fin. Conditions 6 12 18 24

40
20

20 US Policy Liquidity 6 12 18 24

10

10 US Risk Appetite 6 12 18 24

60
40
20

20 40 US Cross-border Flows 6 12 18 24

0.2

0.2 0.4 0.6 Excess Bond Premium 6 12 18 24

10

10 20 30 VIX 6 12 18 24

0.5

0.5 1 US 1Y Treasury Rate

:

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SLIDE 34

Information Set

Global set Log RW Prior U.S. set Log RW Prior Industrial Production Index, OECD countries

US Industrial Production Index
CPI Index, OECD countries
US Consumer Price Index
CRB Commodity Price Index
US Nominal Stock Price Index
Short-term Interest Differential

US Trade Balance World Stock Price index (excl. North America)

US Nominal Effective Exchange Rate
Global price of Brent Crude ($/BBL)
US Financial Conditions Index, CBC
Kilian (2019) Global Economic Activity Index

US Policy Liquidity Index, CBC

Euro per US Dollar Exchange rate
US Risk Appetite, CBC

British pound per US Dollar Exchange rate

US Cross-border Flows Index, CBC
Japanese Yen per US Dollar Exchange rate
Gilchrist-Zakrajsek Excess Bond Premium

Global Financial Conditions Index, CBC

CBOE VIX
Global Policy Liquidity Index, CBC
US 10-Year Treasury Constant Maturity Rate

Global Risk Appetite, CBC US 1-Year Treasury Constant Maturity Rate Global Cross-border Flows Index, CBC

Notes: Sample: 1990:1 – 2018:8. OECD variables are weighted by the previous year’s GDP (PPP adjusted).
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SLIDE 35

Global Spillovers (BVAR)

6 12 18 24

2

2 4 OECD Production 6 12 18 24

0.5

0.5 OECD CPI 6 12 18 24

10

10 Commodity Price 6 12 18 24

1
0.5
Int. Rate Differential

6 12 18 24

10

10 World Stock Price 6 12 18 24

40
20

20 Oil Price 6 12 18 24

50

50 Global Econ. Activity 6 12 18 24

5

5 10 EURO per USD 6 12 18 24

5

5 10 GBP per USD 6 12 18 24

5

5 10 15 JPY per USD 6 12 18 24

60
40
20

20 Financial Conditions 6 12 18 24

40
20

20 Policy Liquidity 6 12 18 24

40
20

20 Risk Appetite 6 12 18 24

50

50 Cross-border Flows 6 12 18 24 0.5 1 US 1Y Treasury Rate

:

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SLIDE 36

Global Spillovers (BVAR)

6 12 18 24

2

2 4 OECD Production 6 12 18 24

0.5

0.5 OECD CPI 6 12 18 24

10

10 Commodity Price 6 12 18 24

1
0.5
Int. Rate Differential

6 12 18 24

10

10 World Stock Price 6 12 18 24

40
20

20 Oil Price 6 12 18 24

50

50 Global Econ. Activity 6 12 18 24

5

5 10 EURO per USD 6 12 18 24

5

5 10 GBP per USD 6 12 18 24

5

5 10 15 JPY per USD 6 12 18 24

60
40
20

20 Financial Conditions 6 12 18 24

40
20

20 Policy Liquidity 6 12 18 24

40
20

20 Risk Appetite 6 12 18 24

50

50 Cross-border Flows 6 12 18 24 0.5 1 US 1Y Treasury Rate

:

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SLIDE 37

Global Spillovers (BVAR)

6 12 18 24

2

2 4 OECD Production 6 12 18 24

0.5

0.5 OECD CPI 6 12 18 24

10

10 Commodity Price 6 12 18 24

1
0.5
Int. Rate Differential

6 12 18 24

10

10 World Stock Price 6 12 18 24

40
20

20 Oil Price 6 12 18 24

50

50 Global Econ. Activity 6 12 18 24

5

5 10 EURO per USD 6 12 18 24

5

5 10 GBP per USD 6 12 18 24

5

5 10 15 JPY per USD 6 12 18 24

60
40
20

20 Financial Conditions 6 12 18 24

40
20

20 Policy Liquidity 6 12 18 24

40
20

20 Risk Appetite 6 12 18 24

50

50 Cross-border Flows 6 12 18 24 0.5 1 US 1Y Treasury Rate

:

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SLIDE 38

Global Spillovers (BVAR)

6 12 18 24

2

2 4 OECD Production 6 12 18 24

0.5

0.5 OECD CPI 6 12 18 24

10

10 Commodity Price 6 12 18 24

1
0.5
Int. Rate Differential

6 12 18 24

10

10 World Stock Price 6 12 18 24

40
20

20 Oil Price 6 12 18 24

50

50 Global Econ. Activity 6 12 18 24

5

5 10 EURO per USD 6 12 18 24

5

5 10 GBP per USD 6 12 18 24

5

5 10 15 JPY per USD 6 12 18 24

60
40
20

20 Financial Conditions 6 12 18 24

40
20

20 Policy Liquidity 6 12 18 24

40
20

20 Risk Appetite 6 12 18 24

50

50 Cross-border Flows 6 12 18 24 0.5 1 US 1Y Treasury Rate

:

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SLIDE 39

Global Spillovers (BVAR)

6 12 18 24

2

2 4 OECD Production 6 12 18 24

0.5

0.5 OECD CPI 6 12 18 24

10

10 Commodity Price 6 12 18 24

1
0.5
Int. Rate Differential

6 12 18 24

10

10 World Stock Price 6 12 18 24

40
20

20 Oil Price 6 12 18 24

50

50 Global Econ. Activity 6 12 18 24

5

5 10 EURO per USD 6 12 18 24

5

5 10 GBP per USD 6 12 18 24

5

5 10 15 JPY per USD 6 12 18 24

60
40
20

20 Financial Conditions 6 12 18 24

40
20

20 Policy Liquidity 6 12 18 24

40
20

20 Risk Appetite 6 12 18 24

50

50 Cross-border Flows 6 12 18 24 0.5 1 US 1Y Treasury Rate

:

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SLIDE 40

Global variables (BLP)

6 12 18 24

2

2 OECD Production 6 12 18 24

0.5

0.5 OECD CPI 6 12 18 24

10
5

5 Commodity Price 6 12 18 24

1
0.5
Int. Rate Differential

6 12 18 24

10

10 World Stock Price 6 12 18 24

40
20

20 Oil Price 6 12 18 24

40
20

20 40 Global Econ. Activity 6 12 18 24

5

5 10 EURO per USD 6 12 18 24

5

5 10 GBP per USD 6 12 18 24

5

5 10 JPY per USD 6 12 18 24

60
40
20

20 Financial Conditions 6 12 18 24

40
20

20 Policy Liquidity 6 12 18 24

40
20

20 Risk Appetite 6 12 18 24

50

50 Cross-border Flows 6 12 18 24 0.5 1 US 1Y Treasury Rate

:

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SLIDE 41

Channels of Transmission

6 12 18 24

2

2 OECD Production 6 12 18 24

0.5

0.5 OECD CPI

5

EURO per USD GBP per USD

no Oil Price no Glo. Econ. Activity no VIX, EBP no CBC variables baseline 24 US 1Y Treasury Rate

:

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SLIDE 42

Advanced Economies

:

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SLIDE 43

Countries and Data Coverage

Countries Data coverage Australia Jan 1990 - Aug 2018 Austria Jan 1990 - Aug 2018 Belgium Jan 1990 - Aug 2018 Canada Jan 1990 - Aug 2018 Denmark Jan 1990 - Aug 2018 Finland Jan 1990 - Aug 2018 France Jan 1990 - Aug 2018 Germany Jan 1990 - Aug 2018 Italy Jan 1990 - Aug 2018 Japan Jan 1990 - Aug 2018 Netherlands Jan 1990 - Aug 2018 Norway Jan 1990 - Aug 2018 Spain Jan 1990 - Aug 2018 Sweden Jan 1990 - Aug 2018 UK Jan 1990 - Aug 2018

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SLIDE 44

Bilateral VARs

Yit = ci +

p

j=1

AijYi,t−j + uit, p = 12 Yit =   yi,t yUS,t xt   , yi,t =    IPi,t CPIi,t . . .    , xt =   POILt GEAIt V IXt   Bilateral VAR for country i:

◮ Standard Normal-Inverse Wishart macro priors ◮ Optimal prior selection (GLP, 2015) ◮ IV SVAR identification

:

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SLIDE 45

Information Set

Foreign set Logs RW Prior U.S. set Logs RW Prior Industrial Production Index

US Industrial Production Index
Consumer Price Index
US Consumer Price Index
Core CPI Index
US Core CPI Index
Nominal Stock Price Index
US Nominal Stock Price Index
Trade Balance

US Trade Balance Nominal USD Exchange Rate

US Nominal Effective Exchange Rate
Short-term Interest Rate

US 10-Year Treasury Constant Maturity Rate

Policy Rate

US Financial Conditions Index, CBC

Long-term Interest Rate

US Policy Liquidity Index, CBC

Financial Conditions Index, CBC
US Risk Appetite, CBC

Policy Liquidity Index, CBC

US Cross-Border Flows Index, CBC
Risk Appetite, CBC

US 1-year Treasury constant maturity rate

Cross-Border Flows Index, CBC
Global price of Brent Crude
Kilian (2019) Global Economic Activity Index

CBOE VIX

:

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SLIDE 46

Aggregation into Mean Economy

◮ Country i ∈ N IRFs for variable y at horizon h

IRF h

y, i = ∂yi, t+h

∂ǫMP

US, t ◮ Mean country response

IRF h

y = 1

N

i

IRF h

y, i

:

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SLIDE 47

Mean Advanced Economy (BVAR)

6 12 18 24

1

1 2 Industrial Production 6 12 18 24

0.4
0.2

CPI 6 12 18 24

0.2

0.2 Core CPI 6 12 18 24

2

2 4 6 Nominal Stock Price 6 12 18 24

0.6
0.4
0.2

0.2 Trade Balance 6 12 18 24

2

2 4 6

Nom. Exchange Rate

6 12 18 24

0.4
0.2

0.2 0.4 Short-term Interest Rate 6 12 18 24

0.5

0.5 Policy Rate 6 12 18 24

0.4
0.2

0.2 Long-term Interest Rate 6 12 18 24

30
20
10

10 Financial Conditions 6 12 18 24

10

10 Policy Liquidity 6 12 18 24

15
10
5

5 Risk Appetite 6 12 18 24

20
10

10 Cross-border Flows 6 12 18 24

40
20

20 Oil Price 6 12 18 24

40
20

20 40 Global Econ. Activity 6 12 18 24

20

20 40 VIX 6 12 18 24

0.5

0.5 1 US 1Y Treasury Rate

:

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SLIDE 48

CPI (BVAR)

6 12 18

0.5

0.5 1 AUSTRALIA 6 12 18

0.5

0.5 AUSTRIA 6 12 18

1
0.5

0.5 BELGIUM 6 12 18

1
0.5

0.5 CANADA 6 12 18

1
0.5

0.5 DENMARK 6 12 18

2
1

FINLAND 6 12 18

0.5

0.5 FRANCE 6 12 18

0.8
0.6
0.4
0.2

0.2 0.4 GERMANY 6 12 18

0.5

0.5 ITALY 6 12 18

0.5

0.5 JAPAN 6 12 18

1.5
1
0.5

NETHERLANDS 6 12 18

0.5

0.5 1 NORWAY 6 12 18

1

1 SPAIN 6 12 18

1
0.5

0.5 SWEDEN 6 12 18

0.5

0.5 UK Response of: CPI

:

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SLIDE 49

Financial Conditions (BVAR)

6 12 18

150
100
50

50 AUSTRALIA 6 12 18

40
20

20 40 AUSTRIA 6 12 18

60
40
20

20 BELGIUM 6 12 18

40
20

20 CANADA 6 12 18

150
100
50

50 DENMARK 6 12 18

40
20

20 FINLAND 6 12 18

50

50 FRANCE 6 12 18

40
20

20 GERMANY 6 12 18 50 100 ITALY 6 12 18

50

50 JAPAN 6 12 18

60
40
20

20 NETHERLANDS 6 12 18

50

50 100 NORWAY 6 12 18

20

20 SPAIN 6 12 18

20

20 SWEDEN 6 12 18

150
100
50

50 UK Response of: CBCFCI

:

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SLIDE 50

Cross-border Flows (BVAR)

6 12 18

100
50

50 AUSTRALIA 6 12 18

40
20

20 AUSTRIA 6 12 18

50

50 BELGIUM 6 12 18

80
60
40
20

20 40 CANADA 6 12 18

40
20

20 40 60 DENMARK 6 12 18

50

50 FINLAND 6 12 18

40
20

20 40 FRANCE 6 12 18

50

50 GERMANY 6 12 18

40
20

20 40 ITALY 6 12 18

60
40
20

20 40 JAPAN 6 12 18

150
100
50

50 NETHERLANDS 6 12 18

40
20

20 NORWAY 6 12 18

50

50 SPAIN 6 12 18

50

50 100 SWEDEN 6 12 18

50

50 100 UK Response of: CBCXFI

:

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SLIDE 51

Mean Advanced Economy (BLP)

6 12 18 24

1

1 2 Industrial Production 6 12 18 24

0.4
0.2

CPI 6 12 18 24

0.2

0.2 Core CPI 6 12 18 24

2

2 4 Nominal Stock Price 6 12 18 24

0.6
0.4
0.2

0.2 Trade Balance 6 12 18 24 2 4 6

Nom. Exchange Rate

6 12 18 24

0.2

0.2 Short-term Interest Rate 6 12 18 24

0.4
0.2

0.2 0.4 0.6 Policy Rate 6 12 18 24

0.4
0.2

0.2 Long-term Interest Rate 6 12 18 24

30
20
10

10 Financial Conditions 6 12 18 24

10

10 20 Policy Liquidity 6 12 18 24

15
10
5

5 Risk Appetite 6 12 18 24

20
10

10 Cross-border Flows 6 12 18 24

30
20
10

10 Oil Price 6 12 18 24

40
20

20 40 Global Econ. Activity 6 12 18 24

20

20 40 VIX 6 12 18 24 0.5 1 US 1Y Treasury Rate

:

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SLIDE 52

Channels of Transmission (BVAR)

6 12 18 24

1

1 Industrial Production

no Exch. Rates 6 12 18 24

0.4
0.2

CPI

6 12 18 24

0.2
0.1

0.1 Core CPI Policy Rate Long-term Int. Rate Financial Conditions

6 12 18 24 6 12 18 24

0.2

0.2 Policy Rate

0.2

US CPI

1

Industrial Production

no Oil Price no Exch. Rates no Trade Bal. no CBC baseline

:

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SLIDE 53

Asymmetric Responses (BVAR)

6 12 18 24

2

2 Industrial Production

Positive Negative 6 12 18 24

0.4
0.2

0.2 0.4 0.6

CPI

6 12 18 24

0.2

0.2 0.4

Core CPI

6 12 18 24

8
6
4
2

2 4

Nominal Stock Price

6 12 18 24

0.5

0.5 Short-term Int. Rate

6 12 18 24

0.5

0.5 Policy Rate

6 12 18 24

20

20 Cross-border Flows

:

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SLIDE 54

Emerging Economies

:

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SLIDE 55

Countries and Data Coverage

Country Data coverage with Core CPI Data coverage without Core CPI Brazil Dec 1999 - Aug 2018 Dec 1999 - Aug 2018 Chile May 1995 - Nov 2013 May 1995 - Nov 2013 China Aug 1994 - Aug 2018 Colombia Sep 2002 - Aug 2018 Sep 2002 - Aug 2018 Czech Republic Apr 2000 - Aug 2018 Apr 2000 - Aug 2018 Hungary Feb 1999 - Aug 2018 Feb 1999 - Aug 2018 India May 1994 - Apr 2018 Malaysia Jan 1996 - Dec 2017 Mexico Nov 1998 - Feb 2018 Nov 1998 - Feb 2018 Philippines Jan 2000 - Feb 2018 Feb 1999 - Feb 2018 Poland Jan 2001 - Aug 2018 Jan 2001 - Aug 2018 Russia Jan 2003 - Jun 2018 Jan 1999 - Jun 2018 South Africa Jan 2002 - Aug 2018 Jan 1990 - Aug 2018 Thailand Jan 1999 - May 2018 Jan 1999 - May 2018 Turkey Jun 2000 - Aug 2018 Jun 2000 - Aug 2018

:

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SLIDE 56

Information Set

Foreign set Logs RW Prior U.S. set Logs RW Prior Industrial Production Index

US Industrial Production Index
Consumer Price Index
US Consumer Price Index
Nominal Stock Price Index
US Nominal Stock Price Index
Trade Balance

US Trade Balance Nominal USD Exchange Rate

US Nominal Effective Exchange Rate
Short-term Interest Rate

US 10-Year Treasury Constant Maturity Rate

Policy Rate

US Financial Conditions Index, CBC

Long-term Interest Rate

US Policy Liquidity Index, CBC

Financial Conditions Index, CBC
US Risk Appetite, CBC

Policy Liquidity Index, CBC

US Cross-Border Flows Index, CBC
Risk Appetite, CBC

US 1-year Treasury constant maturity rate

Cross-Border Flows Index, CBC
Global price of Brent Crude
Kilian (2019) Global Economic Activity Index

BAA spread (corporate minus 10Y Treasury CM) CRB Commodity Price Index

CBOE VIX
:

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SLIDE 57

Mean Emerging Economy (BVAR)

6 12 18 24

5

5 Industrial Production 6 12 18 24

2
1

1 CPI 6 12 18 24

10

10 Nominal Stock Price 6 12 18 24

1

1 2 Trade Balance 6 12 18 24

5

5 10

Nom. Exchange Rate

6 12 18 24

1

1 2 Short-term Interest Rate 6 12 18 24

0.5

0.5 1 1.5 Policy Rate 6 12 18 24

0.4
0.2

0.2 0.4 0.6 0.8 Long-term Interest Rate 6 12 18 24

80
60
40
20

20 Financial Conditions 6 12 18 24

60
40
20

20 Policy Liquidity 6 12 18 24

20
10

10 Risk Appetite 6 12 18 24

20

20 Cross-border Flows 6 12 18 24

50

50 Oil Price 6 12 18 24

100

100 Global Economic Activity 6 12 18 24

1

1 BAA-10Y Spread 6 12 18 24

20

20 Commodity Price 6 12 18 24

50

50 100 150 VIX 6 12 18 24

1

1 2 US 1Y Treasury Rate

:

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SLIDE 58

Mean Emerging Economy (BLP)

6 12 18 24

4
2

2 4 6 Industrial Production 6 12 18 24

2
1

1 CPI 6 12 18 24

10

10 Nominal Stock Price 6 12 18 24

1

1 2 Trade Balance 6 12 18 24

5

5 10

Nom. Exchange Rate

6 12 18 24

1

1 Short-term Interest Rate 6 12 18 24 0.5 1 Policy Rate 6 12 18 24

0.2

0.2 0.4 0.6 0.8 Long-term Interest Rate 6 12 18 24

80
60
40
20

20 Financial Conditions 6 12 18 24

60
40
20

20 Policy Liquidity 6 12 18 24

20
10

10 Risk Appetite 6 12 18 24

20

20 Cross-border Flows 6 12 18 24

80
60
40
20

20 40 Oil Price 6 12 18 24

100

100 Global Econ. Activity 6 12 18 24

1

1 BAA-10Y Spread 6 12 18 24

10

10 20 Commodity Price 6 12 18 24

50

50 100 150 VIX 6 12 18 24

1

1 2 US 1Y Treasury Rate

:

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SLIDE 59

CPI (BVAR)

6 12 18

5

5 BRAZIL 6 12 18

6
4
2

2 CHILE 6 12 18

4
2

CHINA 6 12 18

4
2

2 COLOMBIA 6 12 18

5

5 CZECHREPUBLIC 6 12 18

6
4
2

2 HUNGARY 6 12 18

2

2 INDIA 6 12 18

2
1

1 MALAYSIA 6 12 18

1

1 2 MEXICO 6 12 18

2

2 PHILIPPINES 6 12 18

4
2

2 POLAND 6 12 18

4
2

2 RUSSIA 6 12 18

1

1 SOUTHAFRICA 6 12 18

4
2

2 THAILAND 6 12 18 10 20 TURKEY Response of: CPI

:

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SLIDE 60

Cross-border flows (BVAR)

6 12 18

200
100

100 BRAZIL 6 12 18

100

100 200 CHILE 6 12 18

50

50 CHINA 6 12 18

100

100 COLOMBIA 6 12 18

200

200 CZECHREPUBLIC 6 12 18

100
50

50 HUNGARY 6 12 18

50

50 INDIA 6 12 18

50

50 100 MALAYSIA 6 12 18

100
50

50 MEXICO 6 12 18

50

50 100 PHILIPPINES 6 12 18

100

100 POLAND 6 12 18

50

50 RUSSIA 6 12 18

40
20

20 SOUTHAFRICA 6 12 18

100
50

50 THAILAND 6 12 18

100

100 TURKEY Response of: CBCXFI

:

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SLIDE 61

Channels of Transmission

6 12 18 24

2

2 Industrial Production

no Oil Price, CRBPI no Exchange Rates no GEAI, BAA sp., VIX no CBC variables baseline 6 12 18 24

1.5
1
0.5

0.5 CPI

6 12 18 24 0.5 1

Short-term Interest Rate

6 12 18 24 0.2 0.4 0.6 0.8

Policy Rate

:

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SLIDE 62

Capital Controls

:

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SLIDE 63

Classification

Chinn-Ito Index, 1990-2015 Average ADVANCED AUSTRALIA 0.814 EMERGING BRAZIL 0.262 AUSTRIA 0.965 CHILE 0.517 BELGIUM 0.965 CHINA 0.147 CANADA 1 COLOMBIA 0.272 DENMARK 0.993 CZECH REP. 0.839 FINLAND 0.965 HUNGARY 0.653 FRANCE 0.944 INDIA 0.166 GERMANY 1 MALAYSIA 0.513 ITALY 0.944 MEXICO 0.640 JAPAN 0.988 PHILIPPINES 0.393 NETHERLANDS 1 POLAND 0.315 NORWAY 0.886 RUSSIA 0.432 SPAIN 0.898 SOUTH AFRICA 0.169 SWEDEN 0.942 THAILAND 0.338 UK 1 TURKEY 0.310 ADVANCED MEDIAN 0.965 EMERGING MEDIAN 0.338

:

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SLIDE 64

Classification

Advanced Emerging Open Less Open Open Less Open (Top 33%) (Bottom 33%) (Top 33%) (Bottom 33%) CANADA AUSTRALIA CHILE BRAZIL DENMARK ITALY CZECH REP. CHINA GERMANY NORWAY HUNGARY COLOMBIA NETHERLANDS SPAIN MALAYSIA INDIA UK SWEDEN MEXICO SOUTH AFRICA Average 0.998 0.897 0.632 0.203

:

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SLIDE 65

The Relatively Financially Open Emerging Economy...

6 12 18 24

5

5 10 Industrial Production 6 12 18 24

3
2
1

1 CPI 6 12 18 24

10

10

Nom. Exchange Rate

6 12 18 24 2 4 Short-term Interest Rate 6 12 18 24

1

1 2 Policy Rate

:

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SLIDE 66

...vs. the Relatively Financially Closed Emerging Economy

6 12 18 24

4
2

2 4 6 Industrial Production 6 12 18 24

1

1 CPI 6 12 18 24

10

10 20

Nom. Exchange Rate

6 12 18 24

2
1

1 Short-term Interest Rate 6 12 18 24

1

1 Policy Rate

:

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SLIDE 67

Conclusions – The Global effects of U.S. Monetary Policy

◮ US monetary policy has large and pervasive effects ◮ Spillovers to both prices and real economy ◮ Strong evidence of financial channels ◮ Affect both Advanced Economies and Emerging Markets ◮ Initial evidence of asymmetric effects

:

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SLIDE 68

Appendix

:

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SLIDE 69

Standardisation (z-scores)

Method is the “standard” for Financial Stability Boards: zt = xt − MA(xt, 40) SD(xt, entire period)

◮ 40 months moving average trends ◮ SD over entire period to account for rare events ◮ Expressed in percentiles (50 is trend)

Back...

:

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SLIDE 70

Financial Conditions Index

◮ AKA: Credit Spreads ◮ Index of very short-term credit spreads (e.g. deposit loan spreads) ◮ Derived from the z-scores of each sub-variable, which are equally weighted

and then normalised

◮ Varies between 0 and 100 with 50 indicating “neutral” relative to a

40-month MA

Back...

:

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SLIDE 71

Policy Liquidity Index

◮ AKA: Central Bank Money ◮ Measures size of CB balance sheets and changes in their composition ◮ Derived from the z-scores of each sub-variable, which are equally weighted

and then normalised

◮ Varies between 0 and 100 with 50 indicating “neutral” relative to a

40-month MA

Back...

:

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SLIDE 72

Cross-border Flows Index

◮ AKA: Foreign Liquidity ◮ Comprises all financial flows into a currency (incl. banking flows, bonds and

equities)

◮ Estimated from national trade and current account data, foreign exchange

reserve movements and (interpolated) quarterly data on net FDI flows

◮ Derived from the “normalised” z-score of the value of cross-border flows.

The resulting index varies between 0 and 100 with 50 indicating “neutral” relative to a 40-month moving average

◮ In the Global version, US weight is 24.81%

Back...

:

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SLIDE 73

Risk Appetite

◮ Difference between the Equity Exposure Index and the Bond Exposure Index ◮ Equity Exposure Index: AKA Equity Market Sentiment

◮ Based on the balance sheet exposure of all investors (by type) in the asset

class.

◮ Derived from a z-score of the current portfolio share away from its 5-year

trend, e.g. equity holdings as a percentage of all financial assets

◮ Bond Exposure Index: AKA Bond Market Sentiment

◮ Equivalent of the equity exposure index for bonds Back...

:

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