Evaluating Central Banks' Tool Kit: Past, Present, and Future/media/others/events/... · Model ExogenousPolicies EndogenousQE Future Evaluating Central Banks’ Tool Kit: Past, Present,

Model Exogenous Policies EndogenousQE Future

Evaluating Central Banks’ Tool Kit: Past, Present, and Future

Eric SimsNotre Dame and NBER

Jing Cynthia WuNotre Dame and NBER

Eric Sims and Cynthia Wu (Notre Dame & NBER) 1/ 32


Monetary Policy





Main Takeaways

Simulation: Great Recession

Eric Sims and Cynthia Wu (Notre Dame & NBER) 4 / 32


Main Takeaways


10 20 30 40-20

-10

0

10Output

10 20 30 400

0.1

0.2

0.3CB balancesheet

10 20 30 40-2

0

2

Policyrate

4 MPZLB



Main Takeaways


10 20 30 40-20

-10

0

10Output

10 20 30 400

0.1

0.2

0.3CB balancesheet

10 20 30 40-2

0

2

Policyrate

4 MPZLB QE



Shadow Rate

-4%2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Sources: Board of Governors of the Federal Reserve System and Wu and Xia (2015)

-2%

0%

2%

4%

Wu-Xia Shadow Federal Funds Rate

Effective federal funds rate, end-of-month Wu-Xia shadow rate

6%


EndogenousQE FutureModel Exogenous Policies

Contributions: Future



Outline



Model

Medium-scale DSGE model

(a) Households(b) Financial Intermediaries(c) Production(d) Fiscal authority(e) Central Bank: interest-bearing reserves


FutureModel Exogenous Policies EndogenousQE

Debt Instruments and Market Segmentation

Financial Intermediaries

Households𝑅𝑅𝑅𝑅𝑑𝑑𝑑𝑑(Deposits)

𝑅𝑅𝑅𝑅𝑟𝑟𝑟𝑟𝑟𝑟𝑟𝑟

(Res

erve

s)

Firm

Government

CentralBank

𝑅𝑅𝑅𝑅𝐹𝐹𝐹𝐹(Bonds F)

Four types of debt instruments in our model� Short term: deposits (Rd ) and reserves(Rre )� Long term: private (RF ) and government (RB ) perpetual bonds (Woodford, 2001)



Monetary Policy

Long rate = expectation + risk premium



Conventional Policy

Conven tional.,Long rate = expectation +risk premium

Conventional: works on the short rate today

t t − 1ln RTR = ρr ln RTR + Taylor rule + εr,t



Forward Guidance

FG.,Long rate = expectation +risk premium

FG: works on the expected future shortrate

t t − 1ln RTR = ρr ln RTR + Taylor rule + γεr,t

� ZLBd ret tln R = ln R = max 0, lnR TR

t

J

� Timing assumption:� facilitates comparison with NIRP� mitigates “forward guidance puzzle”

� γ ∈ [0, 1]: credibilityEric Sims and Cynthia Wu (Notre Dame & NBER) 12 / 32


QE

“The problem with QE is it works in practice but it doesn’t work in theory” – Bernanke



Constraints



QE



NIRP

Long rate = expectation + risk premiumFG

., .,Bank ing



NIRP

NIRP

Rret = RTR

t

lnRdt = max 0, lnR TR

t

J

FG channel� The same as FG: change future deposit rate

t t − 1ln RTR = ρr ln RTR + Taylor rule + εr,t

� Differently than FG: NIRP involves an observable action R re t



Banking Channel: Contractionary



Conventional Monetary Policy

0 5 10 15 20-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6Output

0 5 10 15 20-0.2

0

0.2

0.4

0.6

0.8

1Inflation

MP



Unconventional Monetary Policy

0 5 10 15 20-0.2

-0.1

0

0.1

0.2

0.3

0.4

0.5

0.6Output

0 5 10 15 20-0.2

0

0.2

0.4

0.6

0.8

1Inflation

MPQENIRPFG



Shock Sizes

0 5 10 15 20-2.5

-2

-1.5

-1

-0.5

0

0.5TR rate

0 5 10 15 20-0.01

0

0.01

0.02

0.03

0.04

0.05CB Balance sheet

MPQENIRPFG



Yield Curve

20

-0.6

0 5 10 15

-0.4

-0.2

0

Depositrate

0 5 10 15 20-1

-0.5

0

Real longyield

-0.40 5 10 15 20

-0.3

-0.2

-0.1

0Nominal longyield

0 5 10 15 20-0.5

0

0.5

Spread

MPQENIRPFG



Summary



Endogenous QE



Liquidity Shock



Liquidity Shock



Liquidity Shock



Productivity Shock



Government Spending Shock



Great Recession

10 20 30 40-20

-10

0

10Output

10 20 30 400

0.1

0.2

0.3CB balance sheet

10 20 30 40-2

0

2

4

Policy rateMPZLBQE



Simulation

-10 -5 0normal

-14

-12

-10

-4

-2

0ZL

B/Q

E

Mean

0 2 8 10 124 6normal

0

2

4

-66

-8

8

10

12

ZLB/

QE

Std

1000 draws



Quantitative Tightening

Benchmark

5 10 15 20 25 30

-10

-6

-4

-2

0Output

5 10 15 20 25 30-5

-8-4

-3

-2

-1

0Inflation

5 10 15 20 25 30

0

0.05

0.1

0.15CBBalance sheet




Immediate selloff after the ZLB

5 10 15 20 25 30

-10

-6

-4

-2

0Output

5 10 15 20 25 30-5

-8-4

-3

-2

-1

0Inflation

5 10 15 20 25 30

0

0.05

0.1

0.15CBBalance sheet




Carry large balance sheet forward

5 10 15 20 25 30

-10

-6

-4

-2

0Output

5 10 15 20 25 30-5

-8-4

-3

-2

-1

0Inflation

5 10 15 20 25 30

0

0.05

0.1

0.15CB Balancesheet

QT has an important impact for the economy during the ZLB.



NIRP and the Balance Sheet

0 5 10 15 20-0.05

0

0.05

0.1

0.15

0.2

0.25Output

0 5 10 15 20-1

-0.8

-0.6

-0.4

-0.2

0

0.2TRrate

NIRP:pre-QENIRP:QE3NIRP:Euro



ELB on Policy Rate

What is the lowest policy rate that the constraint FIs don’t want to voluntarily shut down?

0 1 2 3 4 5 6 7 8 9Reserves/Output

0

-0.1

-0.2

-0.3

-0.4

-0.5

-0.6

-0.7

-0.8

-0.9

-1

ELB

We provide a useful first benchmark to endogenize ELB



Conclusion


Evaluating Central Banks' Tool Kit: Past, Present, and Future/media/others/events/... · Model ExogenousPolicies EndogenousQE Future Evaluating Central Banks’ Tool Kit: Past, Present,

Documents