Pushing on a string: US monetary policy is less powerful in recessions

Transcription

1 Pushing on a string: US monetary policy is less powerful in recessions Silvana Tenreyro and Gregory Thwaites LSE and Bank of England September 13

2 Disclaimer This does not represent the views of the Bank of England

3 Summary US monetary policy shocks have much more powerful effects on output and inflation during economic expansions than during recessions.

4 Summary US monetary policy shocks have much more powerful effects on output and inflation during economic expansions than during recessions. A shock that raises the policy rate by 1pp has an impulse response many times larger in a boom than in a recession.

5 Summary US monetary policy shocks have much more powerful effects on output and inflation during economic expansions than during recessions. A shock that raises the policy rate by 1pp has an impulse response many times larger in a boom than in a recession. The effect is most pronounced in household durables expenditure, but also present in business investment and nondurable consumption.

6 Summary US monetary policy shocks have much more powerful effects on output and inflation during economic expansions than during recessions. A shock that raises the policy rate by 1pp has an impulse response many times larger in a boom than in a recession. The effect is most pronounced in household durables expenditure, but also present in business investment and nondurable consumption. What is not going on

7 Summary US monetary policy shocks have much more powerful effects on output and inflation during economic expansions than during recessions. A shock that raises the policy rate by 1pp has an impulse response many times larger in a boom than in a recession. The effect is most pronounced in household durables expenditure, but also present in business investment and nondurable consumption. What is not going on No systematic difference across regimes in the responses of taxes, government spending, credit volumes or credit spreads to monetary shocks

8 Summary US monetary policy shocks have much more powerful effects on output and inflation during economic expansions than during recessions. A shock that raises the policy rate by 1pp has an impulse response many times larger in a boom than in a recession. The effect is most pronounced in household durables expenditure, but also present in business investment and nondurable consumption. What is not going on No systematic difference across regimes in the responses of taxes, government spending, credit volumes or credit spreads to monetary shocks No difference in proportion of positive or negative shocks across regimes

9 Summary US monetary policy shocks have much more powerful effects on output and inflation during economic expansions than during recessions. A shock that raises the policy rate by 1pp has an impulse response many times larger in a boom than in a recession. The effect is most pronounced in household durables expenditure, but also present in business investment and nondurable consumption. What is not going on No systematic difference across regimes in the responses of taxes, government spending, credit volumes or credit spreads to monetary shocks No difference in proportion of positive or negative shocks across regimes No effect from shocks being larger or smaller in different regimes

10 Plan for today Literature Method Data Results Discussion

11 Literature Mixed results on state-dependence of monetary policy multipliers Identification problems (common to many studies on effects of policy) General form is (y t y t ) = α (L) (y t 1 y t 1 ) + βx t + ε t where x is shock and y is outcome Older studies typically allow only a proper subset of {α (L), β, y} to depend on the state of the cycle We allow generalise β to β (L) and allow it to depend flexibly on the cycle (Auerbach and Gorodnichenko) This appears to make a big difference

12 Method (1) Local projection method (Jorda, AER 5) Regress leads of the response variable y on the shocks x Run H separate regressions for h {1,.., H} Coefficient β h on the shock when the lead is h periods is the IRF at horizon h y t+h = β h x t + γ z t + u t, h {1,.., H}

13 Method () Smooth transition regression (Granger and Terasvirta, 1993) Multiply the RHS variables by the state of the economy F (z) and (1 F (z)) where z is an indicator of the state y t = F (z t ) β b x t + (1 F (z t )) β r x t + u t ( ) F (z t ) = exp θ (z t c) σ z ( ) 1 + exp θ (z t c) σ z β b is the coefficient in an expansion, β r is the coefficient in a recession.

14 Method (3) Smooth transition, local projection model (Auerbach and Gorodnichenko, Ramey et al). Run H regressions of the following form ( ) ) y t+h = F (z t ) β h b x t + γ b z t + (1 F (z t )) (β h r x t + γ r z t + u t β h b h {1,.., H} is the IRF at horizon h if you were in an expansion when the shock hit

15 Data US national accounts data Exclude the crisis and the ZLB Extended series of Romer monetary policy shocks (Coibion et al.) State variable centred 7-quarter moving average of GDP growth (Auerbach and Gorodnichenko)

16 Results (1) - GDP GDP level impulse response linear Expansion Recession T stat: boom = recession Log points

17 Results () - Household durable consumption and housing investment.4. Durables level impulse response linear Expansion Recession 1.5 T stat: boom = recession 1.5 Log points

18 Results (3) - Nondurable household consumption Log points Nondurables level impulse response.1 linear.8 Expansion Recession T stat: boom = recession

19 Results (4) - GDP deflator inflation (quarterly annualised) 4 x 1-3 Inflation impulse response linear Expansion Recession 1 T stat: boom = recession - -4 Log points

20 What is not going on Positive v negative shocks: y t+h = τt + α b h + β+ h max [, ε t] + β h min [, ε t] + γ b x t + u t Positive shocks (tightenings) have bigger effects, but they are equally common in booms and recessions So cannot explain our finding

21 What is not going on Positive v negative shocks: y t+h = τt + α b h + β+ h max [, ε t] + β h min [, ε t] + γ b x t + u t Positive shocks (tightenings) have bigger effects, but they are equally common in booms and recessions So cannot explain our finding Large v small shocks y t+h = τt + α b h + β s h ε t + β l h ε3 t + γ b x t + u t If anything, bigger shocks are proportionally more powerful, but noally signficant Fatter tails during recessions So cannot explain our finding

22 What is not going on Positive v negative shocks: y t+h = τt + α b h + β+ h max [, ε t] + β h min [, ε t] + γ b x t + u t Positive shocks (tightenings) have bigger effects, but they are equally common in booms and recessions So cannot explain our finding Large v small shocks y t+h = τt + α b h + β s h ε t + β l h ε3 t + γ b x t + u t If anything, bigger shocks are proportionally more powerful, but noally signficant Fatter tails during recessions So cannot explain our finding No significant difference in responses of fiscal policy or credit spreads across the cycle

23 Issues to explore Nonlinear identification scheme Normalisation of shocks across regimes

24 Outline of a model - intuition The difference in the effect of policy is most pronounced in durables purchases

25 Outline of a model - intuition The difference in the effect of policy is most pronounced in durables purchases Durables purchases are lumpy, characterised by long periods of inaction

26 Outline of a model - intuition The difference in the effect of policy is most pronounced in durables purchases Durables purchases are lumpy, characterised by long periods of inaction More likely to be in inaction zone during a recession (Berger and Vavra)

27 Outline of a model - intuition The difference in the effect of policy is most pronounced in durables purchases Durables purchases are lumpy, characterised by long periods of inaction More likely to be in inaction zone during a recession (Berger and Vavra) In an expansion: You were thinking of buying a new car The central bank cuts (raises) interest rates You buy a bigger (smaller) one

28 Outline of a model - intuition The difference in the effect of policy is most pronounced in durables purchases Durables purchases are lumpy, characterised by long periods of inaction More likely to be in inaction zone during a recession (Berger and Vavra) In an expansion: You were thinking of buying a new car The central bank cuts (raises) interest rates You buy a bigger (smaller) one In a recession: You have just lost your job You don t need your car and don t want to buy a new one A small cut in interest rates doesn t change this

29 Outline of a model - intuition The difference in the effect of policy is most pronounced in durables purchases Durables purchases are lumpy, characterised by long periods of inaction More likely to be in inaction zone during a recession (Berger and Vavra) In an expansion: You were thinking of buying a new car The central bank cuts (raises) interest rates You buy a bigger (smaller) one In a recession: You have just lost your job You don t need your car and don t want to buy a new one A small cut in interest rates doesn t change this

30 Extra charts

31 Shocks and state 1.5 Monetary policy shocks Probability of an expansion

32 Distribution of shocks PDF expansion recession average CDF expansion recession average

33 Baseline parameters - expenditure volumes. Consumption of durables and housing investment volume.5.. Log points Consumption 5 x of nondurables and services volume x Log points Fixed business investment volume Log points Three models Linear model Expansion Recession 4 1 Expansion = Recession

34 Baseline parameters - expenditure prices. Consumption 5 x of durables and housing investment inflation x 1 3 Log points Consumption 5 x of nondurables and services inflation x Log points Fixed business investment inflation Log points Three models Linear model Expansion Recession 4 1 Expansion = Recession

35 Baseline parameters - other response variables Log points Log points Log points Log points Government consumption volume Tax GDP ratio GZ spread Private nonfinancial debt GDP ratio Three models Linear model Expansion Recession Expansion = Recession

36 Headline variables - positive v negative shocks 5 x GDP volume.1.1 Log points x x 1 3 GDP inflation Log points 5 5 Percentage points Three models Linear model Federal funds rate Positive shocks 1 Negative shocks Positive = Negative

37 Headline variables - coefficient on cube of shocks GDP volume GDP inflation Romer shocks quarterly average