Search

Two hallmarks of U.S. monetary policy since the 1981–1982 recession are declining interest rates and moderation in inflation, at least until recently. Coincident with these trends was a surge in U.S. wealth inequality, with the Gini coefficient up by 0.070 between 1983 and 2019. This article analyzes the connection between these two developments on the basis of the Survey of Consumer Finances. Contrary to expectations, the article finds that these two monetary effects reduced wealth inequality rather than increasing it. The effect is quite sizeable, with the Gini coefficient declining by 0.045 over these years. Asset price changes and debt devaluation also accounted for 72.6 percent of the advance of mean wealth and would have led to a 204.9 percent gain in median wealth compared to its actual rise of 23.4 percent. Moreover, they helped lower the racial wealth gap rather than enlarging it. These results are at odds with previous literature in which estimates range from a weak negative effect on inequality to neutral, small positive, and strong positive. In terms of methodology, this article differs from previous work by focusing on only the direct effects of interest rate changes and inflation on the household balance sheet. [ABSTRACT FROM AUTHOR]

This article provides a critical analysis of the consistency of the standard approaches for market and credit risks under Solvency II and the current and forthcoming Basel III standards. The comparability is assessed both theoretically via a detailed comparison of the capital standards and in a numerical analysis that contrasts the capital charges for a stylized portfolio. Our examination reveals substantial discrepancies in the design of the frameworks. These lead to vastly differing capital requirements for the same risks. Moreover, the analysis indicates higher charges for banks than insurers, especially under the proposed new Basel III standard approaches. [ABSTRACT FROM AUTHOR]

This study employs the panel vector autoregressive (PVAR) model to examine the spillover effect of US unconventional monetary policy on inflation and non-inflation targeting emerging markets post credit crunch and during COVID-19 from 2000Q1 to 2020Q4. Unlike other analyses, this paper adds to the existing body of knowledge by employing a dummy variable to represent the United States' quantitative easing. Other included control variables are equity prices, the federal reserve rate, the exchange rate, central bank assets and the short-term interest rate. This paper estimated two-panel VARs, Model one and Model two, for inflation and non-inflation targeting emerging markets, respectively. Model one consists of eight inflation-targeting markets, and Model two consists of four non-inflation-targeting countries. Other included control variables are equity prices, the federal reserve rate, the nominal effective exchange rate, and the central bank policy rate. According to the empirical results, the US unconventional monetary policy induces a surge in the exchange rate and a decrease in the central bank policy rate for both inflation and non-inflation targeting emerging markets. However, there was no significant impact on the equity prices. The empirical results are statistically significant, robust, and consistent with previous studies except for the response of equity prices. Unconventional monetary policy is effective in steering macroeconomic variables in developed economies. The monetary policymakers in emerging markets must also use the currency reserve to stabilise the macroeconomic variables in response to US unconventional monetary policy shocks. [ABSTRACT FROM AUTHOR]

To overcome the limits on traditional monetary policy imposed by the effective lower bound on short-term interest rates, in recent years the Federal Reserve and other advanced-economy central banks have deployed new policy tools. This lecture reviews what we know about the new monetary tools, focusing on quantitative easing (QE) and forward guidance, the principal new tools used by the Fed. I argue that the new tools have proven effective at easing financial conditions when policy rates are constrained by the lower bound, even when financial markets are functioning normally, and that they can be made even more effective in the future. Accordingly, the new tools should become part of the standard central bank toolkit. Simulations of the Fed's FRB/US model suggest that, if the nominal neutral interest rate is in the range of 2–3 percent, consistent with most estimates for the United States, then a combination of QE and forward guidance can provide the equivalent of roughly 3 percentage points of policy space, largely offsetting the effects of the lower bound. If the neutral rate is much lower, however, then overcoming the effects of the lower bound may require additional measures, such as a moderate increase in the inflation target or greater reliance on fiscal policy for economic stabilization. (JEL D78, E31, E43, E52, E58, E62) [ABSTRACT FROM AUTHOR]

During the 1934–39 recovery from the U.S. Great Depression, overnight interest rates were usually at a lower bound. Meanwhile, American monetary authorities followed policies related to today's debates on quantitative easing: they tried to stabilize yields on Treasury bonds with open market operations; they created rapid growth in high‐powered money; and they allowed transitory factors to affect high‐powered money. Effects of these policies on bond yields reveal a portfolio effect of short‐duration asset supply on term premiums. This portfolio effect helps explain why high‐powered money growth was associated with recovery of real activity over 1934–39. [ABSTRACT FROM AUTHOR]

The article explores trends in credit basis spread in the U.S., focusing on the widening of spreads in credit market basis trades between the cash bond and credit-default swap (CDS) markets. It examines three possible sources of the prolonged dislocation between the cash bond and CDS, including increased idiosyncratic risk, strategic positioning in CDS products, and post-crisis regulatory changes. The trade mechanics of the CDS-bond basis trade is reviewed.

Why are interest rates so low in the Unites States? We find that they are low primarily because the premium for safety and liquidity has increased since the late 1990s, and to a lesser extent because economic growth has slowed. We reach this conclusion using two complementary perspectives: a flexible time series model of trends in Treasury and corporate yields, inflation, and long-term survey expectations; and a medium-scale dynamic stochastic general equilibrium model. We discuss the implications of this finding for the natural rate of interest. [ABSTRACT FROM AUTHOR]

In the 1990s, the empirical relationship between money demand and interest rates began to fall apart. We analyze to what extent financial innovations can explain this breakdown. For this purpose, we construct a microfounded monetary model with a money market that provides insurance against liquidity shocks by offering short-term loans and by paying interest on money market deposits. We calibrate the model to U.S. data and find that the introduction of the sweep technology at the beginning of the 1990s, which improved access to money markets, can explain the behavior of money demand very well. Furthermore, by allowing a more efficient allocation of money, the welfare cost of inflation decreased substantially. [ABSTRACT FROM AUTHOR]