How Persistent are Monetary Policy Effects at the Zero Lower Bound?

FRB of St. Louis Working Paper No. 2014-004A

41 Pages Posted: 14 Feb 2014

See all articles by Christopher J. Neely

Christopher J. Neely

Federal Reserve Bank of St. Louis - Research Division

Date Written: February 9, 2014

Abstract

Event studies show that Fed unconventional announcements of forward guidance and large scale asset purchases had large and desired effects on asset prices but do not tell us how long such effects last. Wright (2012) used a structural vector autoregression (SVAR) to argue that unconventional policies have very transient effects on asset prices, with half-lives of 3 months. This would suggest that unconventional policies can have only marginal effects on macroeconomic variables. The present paper shows, however, that the SVAR is unstable, forecasts very poorly and therefore delivers spurious inference about the duration of the unconventional monetary shocks. In addition, implied in-sample return predictability from the SVAR greatly exceeds that which is consistent with rational asset pricing and reasonable risk aversion. Restricted models that respect plausible predictability in asset returns are more stable and imply that the unconventional monetary policy shocks were fairly persistent but that our uncertainty about their effects increases with forecast horizon. Estimates of the dynamic effects of shocks should respect the limited predictability in asset prices.

Keywords: Federal Reserve, monetary policy, quantitative easing, large-scale asset purcjavascript:%20void(0);hase, VAR, forecasting, structural breaks, good deal

JEL Classification: E43, E47, E52, C30

Suggested Citation

Neely, Christopher J., How Persistent are Monetary Policy Effects at the Zero Lower Bound? (February 9, 2014). FRB of St. Louis Working Paper No. 2014-004A, Available at SSRN: https://ssrn.com/abstract=2394941 or http://dx.doi.org/10.2139/ssrn.2394941

Christopher J. Neely (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

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Saint Louis, MO 63011
United States
314-444-8568 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://www.stls.frb.org/research/econ/cneely/

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