Macroeconomic Effects of Monetary Policy : A Yield-curve approach

Abstract

I estimate the macroeconomic effects of monetary policy shocks between 1996-2013 using Inoue and Rossi (2018)'s functional shock approach based on identifying shocks as shifts in the entire term structure of the yield curve around monetary policy announcements. The empirical framework is unique in how it provides a tool to study monetary policy across conventional and unconventional periods within a unified model. The principal contribution of this work is documenting the relationship between the nature of shifts induced in the yield curve by a monetary policy announcement and its macroeconomic impact. I find that shocks in the conventional period that have a larger impact on the long-term yields elicit similar macroeconomic responses as those in the unconventional period, with the responses being in line with standard theory. I also find that shifts in the long-term rates are policy-relevant and cannot be ignored even in the conventional period. Additionally, I correct the shock measure for information frictions and find the results to be qualitatively similar, but with a roughly two-fold magnification of the responses.