Unconventional Monetary Policy and the Great Recession - Estimating the Impact of a Compression in the Yield Spread at the Zero Lower Bound

By Christiane Baumeister, Luca Benati. Social Science Research Network, 2010

132 citations recorded by the source corpus.

We explore the macroeconomic impact of a compression in the long-term bond yield spread within the context of the Great Recession of 2007-2009 via a Bayesian time-varying parameter structural VAR. We identify a ‘pure’ spread shock which, leaving the short-term rate unchanged by construction, allows us to characterise the macroeconomic impact of a compression in the yield spread induced by central banks’ asset purchases within an environment in which the short rate cannot move because it is constrained by the zero lower bound. Two main findings stand out. First, in all the countries we analyse (U.S., Euro area, Japan, and U.K.) a compression in the long-term yield spread exerts a powerful effect on both output growth and inflation. Second, conditional on available estimates of the impact of the FED’s and the Bank of England’s asset purchase programmes on long-term government bond yield spreads, our counterfactual simulations indicate that U.S. and U.K. unconventional monetary policy actions have averted significant risks both of deflation and of output collapses comparable to those that took place during the Great Depression. JEL Classification: E30, E32

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/72a522159f5d202c0841b7e51269666f66e59a4a

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Citations in the corpus

Assessing the Economy-Wide Effects of Quantitative Easing (2012, unknown): “The underlying economic or structural shocks in these models are identified through restrictions on the impulse responses (see, for example, Baumeister and Benati (2010)). We use each of the models to conduct counterfactual analysis of the effects of QE. This exercise relies on the empirical evidenc”
The systematic component of monetary policy in SVARs: An agnostic identification procedure (2015, unknown): “Some recent applications of SVAR identification based on sign and zero restrictions on impulse response functions include Baumeister and Benati (2010), who identify the effects of unconventional monetary policy; Binning (2013), who identifies anticipated government spending shocks; and Peersman and…”
Real Effects of Quantitative Easing at the Zero-Lower Bound: Structural VAR-Based Evidence from Japan (2011, background): “Studies using sign restrictions to identify unconventional monetary shocks include Baumeister and Benati (2010), Peersman (2010) and Kamada and Sugo (2006).”
The effectiveness of unconventional monetary policy at the zero lower bound : a cross-country analysis (2014, unknown): “[10] Baumeister, C.”
Quantitative Easing and Unconventional Monetary Policy – an Introduction (2012, background): “In one of the ﬁrst studies of this nature, Baumeister and Benati (2010) estimate a time-varying parameter structural VAR to investigate the macro-economic impact of lower long-term bond spreads during the 2007–09 recession period.”
QE 1 vs. 2 vs. 3. . . : A Framework for Analyzing Large-Scale Asset Purchases as a Monetary Policy Tool (2013, background): “financial crises should have to explain: (1) a disruption in the flow of bank credit; (2) a sharp increase in credit spreads; (3) a rise in open market credit relative to bank credit (i.”
Time-Varying Parameter VAR Model with Stochastic Volatility: An Overview of Methodology and Empirical Applications (2011, background): “, Benati and Surico [2008], Mumtaz and Surico [2009], Baumeister and Benati [2010], and Clark and Terry [2010]).”
Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events (2011, result): “22 | P a g e These results are consistent with the findings of Baumeister and Benati (2010), who also find large effects on real activity and inflation from reduced bond yields using a Bayesian VAR framework.”