Back to Normal? Assessing the Effects of the Federal Reserve’s Quantitative Tightening [Job Market Paper]
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.
Credit Controls as a Monetary Policy Tool: Evidence from the Italian Experience (1973-1986) (in progress)
Abstract: This paper provides a quantitative evaluation of the effects of the direct credit controls that were used as a monetary policy tool by the Banca d'Italia from the mid-1970s to the early 1980s. 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 trade balance, as well as on bank credit allocation across sectors. We find that credit controls had contractionary effects on output, which were overall qualitatively comparable with those obtained from shocks in the policy rate. However, credit policy was less effective at improving the external balance and credit ceilings actually raised prices due to supply-side tensions. These findings provide quantitative support for the view that credit policy tools, while effective as countercyclical instruments, proved less efficient than conventional monetary policy and created unintended economic distortions. Overall, this evidence suggests that policymakers gradually phased out these tools after a decade.
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.