Unconventional monetary policies and expectations on economic variables
1Bank of Italy, Directorate General for Economics, Statistics and Research, Rome, Italy.
Empirical Economics
|March 14, 2022
Summary
Unconventional monetary policies, including forward guidance (FG) and large-scale asset purchases (LSAP), effectively steer economic expectations in the USA. LSAP shocks show stronger effects than FG shocks, with contractionary shocks being more impactful.
Area of Science:
- Economics
- Monetary Policy
- Econometrics
Background:
- Central banks utilize unconventional monetary policies to influence economic expectations.
- Forward guidance (FG) and large-scale asset purchases (LSAP) are key unconventional tools.
Purpose of the Study:
- To investigate the effectiveness of FG and LSAP in steering economic expectations in the USA.
- To compare the impact of FG shocks versus LSAP shocks on economic expectations.
Main Methods:
- Utilized monetary policy shocks from Swanson (2021).
- Employed local projections and an algorithm for optimal empirical model selection.
- Analyzed responses to both expansionary and contractionary monetary policy shocks.
Main Results:
- Unconventional monetary policies effectively influence economic expectations.
- LSAP shocks demonstrate a stronger impact on expectations compared to FG shocks.
- Contractionary LSAP shocks elicit larger responses than expansionary LSAP shocks.
Conclusions:
- FG and LSAP are potent tools for central banks to manage economic expectations.
- The magnitude and direction of LSAP shocks significantly influence their effectiveness.
- Empirical evidence supports the efficacy of these unconventional policies in aligning expectations with central bank objectives.
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