Research
Back to Normal? Assessing the Effects of the Federal Reserve’s Quantitative Tightening
Abstract: We study the effects of the Federal Reserve’s two Quantitative Tightening (QT) programmes implemented over the last decade. We use a high frequency identification strategy to distinguish between conventional monetary policy shocks, Treasury borrowing announcement shocks and the unwinding of the balance sheet. Further, we analyse both QT announcements and operations. Our results show that the Fed was successful in muting the signalling effect of its Balance Sheet Policy (BSP) announcements, as statements not containing quantitative information about QT did not impact significantly asset prices. Conversely, communications disclosing information over the size and the pace of QT had an effect on financial markets. We also find that QT operations have a significant and persistent deflationary effect on interest rates and asset prices. A 1-trillion USD reduction in securities holdings by the Fed is associated with an increase in 10-year Treasury yields by 2 percentage points. While the contractionary effects of QT have so far been at least partially offset by liquidity operations that have expanded the supply of reserves, our results suggest that balance sheet reductions entail in principle strong negative effects on financial markets. Although QT does not represent in the policymakers’ view the primary tool to achieve price stability, it is yet far from running quietly in the background of the monetary policy stance.
Type, Size, and Instrument: A Model-Based Analysis of Fiscal Policy Rules (in progress), with M. Andrle, J. P. Ángel M., J. S. Corrales M. and A. Soler
Abstract: The paper contributes to the existing literature on evaluation of fiscal rules by analyzing macroeconomic dynamics and debt stabilization capacity of fiscal reaction functions usually suggested by the fiscal rules implemented by governments. We use an internally consistent macroeconomic model with households and firms forming informed expectations about future government policies. The paper investigates the role of fiscal rules in expectations formation of households and firms and the implications of following fixed numerical targets rather than state-dependent reaction functions, and the consequence of using different fiscal instruments to comply with the rules.
Credit Controls as a Monetary Policy Tool: Evidence from the Italian Experience (1973-1986) (in progress)
Abstract: This paper provides a quantitative evaluation of direct credit controls as a monetary policy tool employed by the Italian central bank during the mid-70s and early 80s. By relying on archival data sources on monetary policy implementation and using a SVAR model with narrative identification, we estimate the effect of credit controls on output, prices and the yield curve, as well as on commercial bank’s funding structure and balance sheet composition.
Forecasting the UK Pound/US Dollar Exchange Rate With a Continuous Time Macroeconometric Model (in progress)
Abstract: Over the last forty years, researchers have repeatedly tried to overturn the puzzling result of Meese and Rogoff (1983), according to which a simple random walk without drift is the best ex post predictor of the nominal exchange rate. We contribute to the literature by estimating a New Keynesian Small Open Economy (NK-SOE) continuous time model of the United Kingdom, with the primary purpose forecasting the Pound/Dollar spot exchange rate. The model consist of 20 simultaneous differential equations, with 8 exogenous variables and 77 parameters. The data sample used for estimation is quarterly, running from 1982Q1 to 2019Q4. The forecasting performance of the model is gauged against the standard random walk without drift. Several forecast evaluation tests are proposed and discussed.