Assessing the Effective Stance of Monetary Policy: A Factor-Based Approach

30 Pages Posted: 11 Nov 2017

See all articles by Christiaan Pattipeilohy

Christiaan Pattipeilohy

De Nederlandsche Bank - Monetary and Economic Policy Department; VU University Amsterdam - Faculty of Economics and Business Administration

Christina Bräuning

De Nederlandsche Bank

Jan Willem van den End

De Nederlandsche Bank

Renske Maas

De Nederlandsche Bank

Date Written: November 9, 2017

Abstract

We present an empirical approach to derive the implicit stance of monetary policy. The indicator can be interpreted as an implied short-term interest rate that is not restricted by the effective lower bound. Factor analysis is used to extract an expectations and term premium component from fitted yield curve data. Based on this, an implied short-term interest rate is constructed, which reflects how much the short-term rate should have fallen to achieve observed drop in long-term yields, assuming it could not have been caused by a fall in the term premium. Following Lombardi and Zhu (2014), we study how the implied rate performs as instrument for monetary policy analysis. Regression analyses suggests that the implied rate provides a good gauge for the identification of non-standard monetary policy shocks, and has responded significantly to financial stress as opposed to the output and inflation gap.

Keywords: Interest Rates, Determination, Term Structure and Effects, Monetary Policy

JEL Classification: E43, E52

Suggested Citation

Pattipeilohy, Christiaan and Bräuning, Christina and van den End, Jan Willem and Maas, Renske, Assessing the Effective Stance of Monetary Policy: A Factor-Based Approach (November 9, 2017). De Nederlandsche Bank Working Paper No. 575. Available at SSRN: https://ssrn.com/abstract=3067911 or http://dx.doi.org/10.2139/ssrn.3067911

Christiaan Pattipeilohy (Contact Author)

De Nederlandsche Bank - Monetary and Economic Policy Department ( email )

Westeinde 1
1017 ZN Amsterdam
Netherlands

VU University Amsterdam - Faculty of Economics and Business Administration ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Christina Bräuning

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Jan Willem van den End

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Renske Maas

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Register to save articles to
your library

Register

Paper statistics

Downloads
20
Abstract Views
180
PlumX Metrics