Transcript Asset Prices and Monetary Policy

Comments on:
Monetary Responses to the Financial Crisis of
2007-2008: The case for further action
by Joseph Gagnon
Stefan Gerlach
University of Frankfurt
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Paper does three things:
1. Provides a time line of the crisis responses.
2. Argues that QE policies have been effective.
3. Suggests that monetary policy is now too tight,
particularly in the euro area (-4%).
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© Stefan Gerlach
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One comment …
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Inherently difficult to assess effectiveness of QE:
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Policy interventions reduce spreads and promote liquidity.
Rising spreads and falling liquidity trigger policy action.
… and one quibble:
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Taylor rule analysis can be misleading.
Rates in euro area at about or below the expected
level.
© Stefan Gerlach
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Taylor rules:
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Poorly fitting models unlikely to provide plausible
forecasts.
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Euro area models (e.g., Gerlach, IJCB, 2007):
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Quarterly pre-EMU data (1984q2 – 2007q2).
Fitted model uses output growth and consumption deflator.
Large parameter on inflation (1.6)
PMI.
Headline inflation insignificant.
Change in effective exchange rate.
M3 growth (!)
© Stefan Gerlach
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Real GDP and PMI
70
Real GDP growth (LHS)
PMI (RHS)
4
60
50
0
40
30
-4
20
01
02
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04
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07
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Measures of inflation
4
4
3
3
2
2
1
1
Headline
"Core"
Consumption deflator
0
0
-1
-1
01
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03
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Two Empirical Taylor Rules
Lagged
Output
interest rate growth
1.
2.
PMI
Headline inf.
0.86
0.26
0.36
(20.2)
(7.12)
(3.70)
“Core”
inf.
Eff. ex.
rate
M3
Adj. R2
(changes)
0.61
0.94
0.06
0.15
-0.02
0.04
(32.4)
(7.25)
(2.2)
(4.1)
(2.0)
0.83
Dependent variable: 3-month interest rate.
Sample period: 1999q1 – 2007q2.
The model is i(t) = bi(t-1) + ax(t) + v(t); the adjusted R-squared is from the equivalent
model i(t)-i(t-1) = (b-1)i(t-1) + ax(t) + v(t).
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Dynamic out-of-sample forecasts
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6
6
6
4
4
4
4
2
2
2
2
0
0
0
0
-2
-2
-2
-2
-4
-4
-4
-4
2006
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2007
2008
2009
2006
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2008
2009
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Preferred monthly model
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6
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5
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4
3
3
2
2
Sample: Jan 1999 – June 2007.
1
1
0
0
2006
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2009
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