Transcript slides from my recent discussion

Discussion of D’Amico and King’s
“What Does Anticipated Monetary Policy Do?”
Eric T. Swanson
University of California, Irvine
ASSA Meetings
San Francisco
January 4, 2016
Summary of Paper
Idea: get a model-free estimate of effects of forward guidance
shocks on GDP, inflation, etc.
Estimate a VAR on macro variables and survey expectations:
Identify forward guidance shocks using sign restrictions:
• lower expected future interest rates
• higher expected future GDP
• higher expected future inflation
Compare results to forward guidance shocks in standard
New Keynesian model
Summary: Effects of Fwd Guidance are Big
Authors find that forward guidance has large effects
Conventional monetary policy:
GDP
Forward guidance:
GDP
Comment #1: Zero Restriction on Current yt, πt
VAR
Forward guidance should have same zero restrictions on
output, inflation as conventional policy
Comment #2: Sign Restriction on Current it
VAR
Residual covariance matrix
Identify forward guidance shocks via sign restrictions:
Comment #2: Sign Restriction on Current it
Authors impose:
A more natural restriction would be
= 0
• (Same normalization as Gurkaynak, Sack, Swanson, 2005)
• We’re interested in changes in forward guidance that are
orthogonal to (i.e., above and beyond) changes in the
current funds rate
• Authors’ subsequent analysis always includes offsetting
shocks to the current funds rate, anyway
• During ZLB period, equality restriction clearly holds
• Failure to impose this restriction may contaminate
identification
Comment #2: Sign Restriction on Current it
Restriction matters:
Interest rate expectations:
Current interest rate:
Comment #3: Including Forecasts in a VAR
Including survey forecasts in a VAR creates inherent tension:
• VAR is “true” law of motion for the economy
• But survey forecast data provide alternate forecasts
Authors assume Blue Chip survey forecasts are irrational
To support this assumption, authors show VAR forecasts
significantly outperform Blue Chip:
But this result is
• In sample
• With Blue Chip forecasts included in the VAR
• Including early 1980s (nominal data have downtrend)
Comment #3: Including Forecasts in a VAR
Compare to Faust and Wright (2013):
“We find that judgmental survey forecasts outperform modelbased ones, often by a wide margin.”
Overfitting seems to be a problem for the VAR
Calls into question the estimated VAR reduced-form residuals,
identification, and structural shocks:
• Reduced-form residuals are too small
• Structural shocks are too small
• Covariance matrix Σ and hence Γ may not be
representative
• Structural shocks may not be well identified
Comment #3: Including Forecasts in a VAR
Seems to be a fundamental problem with VAR approach to
incorporating “expectations shocks”
Structural model-based analysis (as in NK-type models)
seems better here:
• Expectations shocks are well-defined in a structural model
Authors’ goal of model-free estimates of effects of forward
guidance may be too ambitious.
Comment #4: ZLB Period is Problematic
Zero lower bound period from 2009-15 is problematic:
• ZLB violates linearity of the VAR
• Unconventional monetary policy includes LSAPs as well
as forward guidance
LSAPs seem to satisfy the same sign restrictions as forward
guidance
Authors’ estimates of forward guidance shocks probably
include LSAP effects as well
Summary of Comments
1. Impose same contemporaneous zero restrictions on output
and inflation for forward guidance as for funds rate
2. Impose restriction that forward guidance has no effect on
current federal funds rate (instead of opposite effect)
3. Modeling “expectations shocks” in a VAR is problematic:
• Drop GDP, inflation survey forecasts from VAR?
• Structural NK-type models are probably a better way to
model expectations shocks
• Goal of model-free estimate of forward guidance effects
may be too ambitious
4. ZLB period is problematic
• focus on pre-2008 sample as baseline