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Evolving Monetary Policy in the Aftermath of the Great Recession

Aymeric Ortmans ()
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Aymeric Ortmans: Université Paris-Saclay, Univ Evry, EPEE

No 20-01, Documents de recherche from Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne

Abstract: A Taylor-type monetary policy rule is estimated using a time-varying parameter vector autoregressive model to assess changes in central banks' behavior during and after the Great Recession. Based on US and euro area data, the results show that both the Fed and the ECB have changed their behavior after the 2008 crisis. Contemporaneous coefficients have increased with expansionary monetary policy at the ZLB. Althoughthey do not indicate clear evidence of significant changes inthe systematic component of monetary policy, estimated response coefficients suggest dramatic shifts in monetary policy shocks after the Global Financial Crisis. These departures from rule-based behavior - i.e. monetary policy discretion - are increasingly larger with the implementation of non-standard measures. Unconventional monetary policy shocks are shown to strongly affect the US macroeconomy and to contribute to the variance of inflation and output even more importantly when the Fed eased its monetary policy at the ZLB. This is not the case in the euro area, despite increasing monetary policy shocks in unconventional times. A counterfactual analysis shows however thatthe shift in the systematic component of monetary policy appears to be a key determinant of the level of inflation and output at the ZLB, especially in the euro area that would have suffered a continuous period of deflation from 2014:1 to 2018:1 without any change in ECB's behavior after the 2008 crisis.

Keywords: Federal Reserve; European Central Bank; Taylor rule; Time-varying parameter VAR; Shadow rate; Zero lower bound (search for similar items in EconPapers)
JEL-codes: C32 E31 E32 E37 E43 E44 E52 E58 (search for similar items in EconPapers)
Pages: 72 pages
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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