Conventional and unconventional monetary policy reaction to uncertainty in advanced economies: evidence from quantile regressions

Christina Christou; Ruthira Naraidoo; Rangan Gupta

doi:10.1515/snde-2018-0056

Artikel

Conventional and unconventional monetary policy reaction to uncertainty in advanced economies: evidence from quantile regressions

Christina Christou , Ruthira Naraidoo und Rangan Gupta

Veröffentlicht/Copyright: 16. Dezember 2019

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Abstract

This paper investigates how the Federal Reserve (Fed) and the Bank of England, Bank of Japan and the European Central Bank reacted in the aftermath of the financial crisis by making use of both conditional and unconditional interest rate quantiles regressions and data on shadow short rate of interest and a measure of uncertainty. Firstly, the unconditional quantile regression offers some support for increased reaction by the Fed as the ZLB is approached. Secondly, the decreased reaction of the Fed and other monetary policy makers towards uncertainty particularly at lower conditional quantiles of interest rates lends support to expansionary mechanism in place during this time. Hence uncertainty is key to policy reaction, and more so during episodes of crisis.

Keywords: advanced economies; conditional and unconditional quantile regressions; interest rate rule; shadow rate of interest; uncertainty; zero lower bound

JEL Classification: C22; E52

Funding source: Open University of Cyprus

Award Identifier / Grant number: 2018/20

Funding statement: This work was supported by the Open University of Cyprus, Funder Id: http://dx.doi.org/10.13039/100012996, Grand No: 2018/20, Essays in Economics.

Appendix

Table 3:

Forward Looking Taylor-type rule: IVQ (Lee 2007) results using 3^rd-order power series.

	τ											Wald test
	0.05	0.10	0.20	0.30	0.40	0.50	0.60	0.70	0.80	0.90	0.95
Panel A: Inflation coefficients α_π
EA	0.9855**	0.5613**	0.1964*	0.1382**	−0.0531**	−0.0129**	−0.2096**	0.4300***	0.3431**	0.2855***	0.1680**	1.84 [0.0544]
Japan	−0.1245	−0.7521	−0.9478	−0.5560**	−0.4393**	−0.6678	−0.3321	0.2027	0.1027	0.1264	0.1334	0.64 [0.7821]
UK	0.5238	1.0574**	0.4919**	0.0701***	−0.0509**	−0.0432	−0.0562	0.2365	0.1296	0.4274	0.1338***	0.54 [0.8577]
US	1.1323	1.4597***	0.8343***	0.1478***	0.7185***	1.2776***	1.4844***	1.8906***	2.1985***	2.4423***	2.6881***	3.03 [0.0011]
Panel B: Gap coefficients α_y
EA	0.0146***	0.0506***	0.2194***	0.2432***	0.2720***	0.2708***	0.2229***	0.2181***	0.2034***	0.2286***	0.2094***	3.49 0.0003
Japan	0.1856	0.2015	0.0674***	0.0514***	0.0702**	0.0227***	0.0591***	0.0257***	0.0243**	0.0213**	0.0240***	1.73 [0.0767]
UK	0.2063***	0.3578***	0.2922**	0.3227***	0.2056***	0.2775***	0.2697***	0.3099***	0.3731***	0.2441***	0.1445***	1.46 [0.1537]
US	−0.4042	−0.2878	0.0074***	0.0185***	0.0495***	0.0597***	0.2080***	0.3070***	0.3638***	0.5211***	0.5512***	4.33 [0.0000]
Panel C: EPU coefficients α_epu
EA	−0.0828***	−0.0793***	−0.0590***	−0.0463***	−0.0429***	−0.0417***	−0.0401***	−0.0353***	−0.0249***	−0.0223***	−0.0223***	8.11 [0.0000]
Japan	−0.0369***	−0.0497***	−0.0301***	−0.0170***	−0.0101***	−0.0139***	−0.0042***	0.0025***	−0.0003***	0.0011***	−0.0020***	0.77 [0.6547]
UK	−5.9176***	−5.6592***	−5.1127***	−5.1449***	−5.0611***	−4.6806***	−4.8604***	−4.9421***	−4.1461***	−4.1799***	−3.8998***	2.61 [0.0050]
US	−0.1171***	−0.0946***	−0.0958***	−0.1128***	−0.1070***	−0.0955***	−0.0791***	−0.0564***	−0.0384***	−0.0271***	−0.0078***	14.61 [0.0000]

Monetary rule: where i_t is the end of month shadow interest rate, π_t+12 is the forward looking inflation, y_t is the output gap, and epu_t is the economic policy uncertainty index. Instruments: 1–3 lags of inflation, output gap and epu. *, **, *** indicate statistical significance at 10%, 5% and 1% statistical levels, respectively. Wald statistic tests the null hypothesis of parameter equality across quantiles. IVQ regressions calculations use power series with k = 3. Figures in square brackets are p-values.

Table 4:

Forward looking Taylor-type rule: IVQ (Lee 2007) results using 5^th-order power series.

	τ											Wald test
	0.05	0.10	0.20	0.30	0.40	0.50	0.60	0.70	0.80	0.90	0.95
Panel A: Inflation coefficients α_π
EA	0.7156	0.6712	0.0660	0.1400	−0.1049	−0.1784	−0.1406	0.3669	0.2570	0.2908	0.0440	2.28 [0.0182]
Japan	0.3570	−0.4202	−1.0473*	−0.5144	−0.4767	−0.5719	−0.3461	0.1648	0.1684	0.1025	0.0439	0.64 [0.7821]
UK	0.6694	0.7858	0.5123	0.6291*	0.1803	0.1125	0.2017	−0.0681	0.1606	0.3624	−0.5817	0.58 [0.8317]
US	1.5754**	1.0651*	1.2215*	0.6256	0.6331	1.0380	1.2652*	1.8998***	2.0167***	2.4165***	1.5310**	1.94 [0.0389]
Panel B: Gap coefficients α_y
EA	0.0465	0.0116	0.1801*	0.2346***	0.2698***	0.2440***	0.2334***	0.1945***	0.1899***	0.2056***	0.2293***	2.35 [0.0117]
Japan	0.1965	0.1963	0.0958	0.0737	0.0664	0.0308	0.0614*	0.0404*	0.0273*	0.0189*	0.0171*	1.40 [0.1796]
UK	0.0607	0.1224	0.2271**	0.2352***	0.2428***	0.2236***	0.2278***	0.2942***	0.3955***	0.2071	0.1453	1.82 [0.0588]
US	−0.5042***	−0.3328***	−0.1187	−0.0409	−0.0102	0.0831	0.2796**	0.3844***	0.5259***	0.5676***	0.7133***	5.45 [0.0000]
Panel C: EPU coefficients α_epu
EA	−0.0797***	−0.0751***	−0.0592***	−0.0456***	−0.0430***	−0.0408***	−0.0413***	−0.0351***	−0.0261***	−0.0220***	−0.0193***	6.65 [0.0000]
Japan	0.0039	0.0156	−0.0063	−0.0084*	−0.0082*	−0.0075*	−0.0051*	0.0006	0.0009	0.0002	−0.0013*	0.77 [0.6547]
UK	−5.8716***	−5.7361***	−5.2243***	−5.1449***	−5.0436***	−5.0415***	−4.9331***	−4.8439***	−4.8017***	−4.4973***	−3.8969***	2.90 [0.0020]
US	−0.0802***	−0.0904***	−0.0912***	−0.0901***	−0.0904***	−0.0762***	−0.0564***	−0.0391***	−0.0087	0.0017	0.0036	26.03 [0.0000]

Monetary rule: it = α0(τ) + απ(τ)πt+12 + αy(τ)yt + αepu(τ)eput, where i_t is the end of month shadow interest rate, π_t₊₁₂ is the forward looking inflation, y_t is the output gap, and epu_t is the economic policy uncertainty index. Instruments: 1–3 lags of inflation, output gap and epu. *, **, *** indicate statistical significance at 10%, 5% and 1% statistical levels, respectively. Wald statistic tests the null hypothesis of parameter equality across quantiles. IVQ regressions calculations use power series with k = 5. Figures in square brackets are p-values.

Table 5:

Backward-looking Taylor-type rule: IVQ (Lee 2007) results using 2^nd-order polynomial.

	τ
	0.05	0.10	0.20	0.30	0.40	0.50	0.60	0.70	0.80	0.90	0.95
Panel A: inflation coefficients α_π
EA	0.6978**	0.4473**	0.3162*	0.1867**	0.3488**	0.3469**	0.5015**	0.4372***	0.6058**	0.3232***	0.4689**	2.02 [0.0317]
Japan	−0.7498	−1.3574	−0.9381	−0.4288**	−0.0373**	0.2270	0.2098	0.5097	0.1833	0.0542	0.0442	0.99 [0.4534]
UK	−0.1041	0.2358**	−0.3443**	−0.4066***	−0.4695**	−0.6316	−0.4131	−0.2923	0.0544	−0.1206	−0.0682***	0.22 [0.9938]
US	0.3953	0.5544***	0.6996***	0.8303***	0.6530***	1.1338***	1.2956***	1.4050***	1.5551***	2.5220***	2.1431***	0.89 [0.5427]
Panel B: Gap coefficients α_y
EA	0.3040***	0.3088***	0.2711***	0.2684***	0.2452***	0.2370***	0.2025***	0.1896***	0.1512***	0.0933***	0.0541***	0.80 [0.6316]
Japan	−0.2670	−0.0183	0.0662***	0.0302***	0.0212**	0.0367***	0.0434***	0.0587***	0.0293**	0.0233**	0.0257***	1.98 [0.0356]
UK	0.2060***	0.4369***	0.3385**	0.2961***	0.2908***	0.2934***	0.3527***	0.3985***	0.3174***	0.2847***	0.1630***	0.79 [0.0000]
US	−0.2820	−0.2431	0.0496***	0.4184***	0.0322***	0.0321***	0.2533***	0.3740***	0.6344***	0.5869***	0.5550***	2.91 [0.0016]
Panel C: EPU coefficients α_epu
EA	−0.0898***	−0.0899***	−0.0841***	−0.0825***	−0.0810***	−0.0792***	−0.0777***	−0.0756***	−0.0750***	−0.0691***	−0.0730***	15.80 [0.0000]
Japan	−0.0780***	−0.0731***	−0.0643***	−0.0712***	−0.0603***	−0.0438***	−0.0331***	0.0073***	−0.0015***	0.0025***	−0.0037***	0.97 [0.4696]
UK	−6.0397***	−5.3121***	−4.9415***	−4.7365***	−4.4479***	−4.1389***	−3.8003***	−3.3262***	−3.2612***	−3.3176***	−3.8631***	2.60 [0.0053]
US	−0.0803***	−0.0903***	−0.0902***	−0.0938***	−0.0890***	−0.0810***	−0.0678***	−0.0491***	−0.0282***	−0.0033***	−0.0004***	8.97 [0.0000]

Monetary rule: it = α0(τ) + απ(τ)πt−12 + αy(τ)yt + αepu(τ)eput, where i_t is the end of month shadow interest rate, π_t_–12 is the backward looking inflation, y_t is the output gap, and epu_t is the economic policy uncertainty index. Instruments: 1–3 lags of inflation, output gap and epu. *, **, *** indicate statistical significance at 10%, 5% and 1% statistical levels, respectively. Wald statistic tests the null hypothesis of parameter equality across quantiles. IVQ regressions calculations use power series with k = 2. Figures in square brackets are p-values.

Table 6:

Contemporaneous Taylor-type rule: IVQ (Lee 2007) results using 2^nd-order power series.

	τ											Wald test
	0.05	0.10	0.20	0.30	0.40	0.50	0.60	0.70	0.80	0.90	0.95
Panel A: Inflation coefficients α_π
EA	0.0983**	0.6857**	0.6691*	0.4013**	0.1192**	0.0211**	0.0334**	0.3481***	0.2995**	0.2288***	0.0231**	0.68 [0.7442]
Japan	−0.0976	−0.5565	−0.7669	−0.7158**	−0.5436**	−0.2532	0.1621	0.2267	0.0376	0.0231	0.0754	0.91 [0.5233]
UK	0.03831	0.1723**	0.0583**	−0.2631***	−0.3839**	−0.1409	0.2816	0.6047	0.1386	−0.0481	0.1586***	0.33 [0.9726]
US	1.6387	0.7714***	1.1919***	0.8855***	0.6120***	0.7107***	0.9847***	1.2719***	2.3995***	1.8278***	2.3486***	0.78 [0.6480]
Panel B: Gap coefficients α_y
EA	0.1831***	0.0797***	0.1898***	0.2442***	0.2368***	0.2952***	0.2356***	0.2144***	0.1834***	0.2292***	0.2079***	1.64 [0.0950]
Japan	0.2032	0.0893	0.1860***	0.0878***	0.0663**	0.0121***	0.0681***	0.0321***	0.0246**	0.0179**	0.0079***	2.08 [0.0266]
UK	0.2649***	0.3495***	0.3248**	0.3175***	0.2795***	0.2485***	0.3199***	0.3908***	0.3516***	0.2984***	0.1347***	0.74 [0.6890]
US	−0.3247	−0.2405	0.0368***	0.0101***	0.0220***	0.0677***	0.3109***	0.4347***	0.3981***	0.5660***	0.6702***	3.87 [0.0001]
Panel C: EPU coefficients α_epu
EA	−0.0815***	−0.0778***	−0.0731***	−0.0582***	−0.0458***	−0.0448***	−0.0431***	−0.0367***	−0.0282***	−0.0215***	−0.0210***	14.04 [0.0000]
Japan	−0.0101***	−0.0135***	−0.0226***	−0.0096***	−0.0093***	−0.0103***	−0.0047***	0.0017***	−0.0001***	0.0003***	−0.0015***	0.72 [0.7026]
UK	−5.7669***	−5.2337***	−4.9601***	−4.8114***	−4.5953***	−4.3952***	−4.0064***	−3.5966***	−3.6440***	−3.7882***	−3.8795***	4.25 [0.0000]
US	−0.0791***	−0.0814***	−0.0839***	−0.0882***	−0.0894***	−0.0794***	−0.0506***	−0.0368***	−0.0069***	0.0089***	0.0180***	13.09 [0.0000]

Monetary rule: it = α0(τ) + απ(τ)πt + αy(τ)yt + αepu(τ)eput, where i_t is the end of month shadow interest rate, π_t is the inflation, y_t is the output gap, and epu_t is the economic policy uncertainty index. Instruments: 1–3 lags of inflation, output gap and epu. *, **, *** indicate statistical significance at 10%, 5% and 1% statistical levels, respectively. Wald statistic tests the null hypothesis of parameter equality across qantiles. IVQ regressions calculations use power series with k = 2. Figures in square brackets are p-values.

Table 7:

Forward looking Taylor-type rule with annualised inflation: IVQ (Lee 2007) results using 2^nd-order power series.

	τ											Wald test
	0.05	0.10	0.20	0.30	0.40	0.50	0.60	0.70	0.80	0.90	0.95
Panel A: Inflation coefficients α_π
EA	0.7739***	1.2431***	1.2799***	0.7421***	0.5484**	0.3304*	0.0863	0.0739	0.1374	0.2447*	0.2620**	1.94 [0.0410]
Japan	−0.7488	−0.3195	−0.5923***	−0.6272***	−0.4285***	−0.4297***	−0.3278**	0.0928	0.0499	0.0483	0.0553	0.74 [0.6885]
UK	−0.1516	−0.0541	−0.1021	−0.0586	−0.0177	−0.0926	−0.1121	0.1828	−0.4259**	−0.9451***	−1.0793***	0.59 [0.4497]
US	1.0465***	0.9584***	1.1359***	1.3528***	1.5158***	1.5006***	1.1580***	1.0909***	1.1112***	1.1219***	1.0888***	1.79 [0.0609]
Panel B: Gap coefficients α_y
EA	−0.0622	−0.0328	0.0714	0.1642*	0.2028**	0.2745***	0.2753***	0.2289***	0.1914***	0.2090***	0.2149***	1.83 [0.0561]
Japan	0.2392	0.2033	0.1227**	0.1002*	0.0692	0.0058	0.0331	0.0555**	0.0254*	0.0182*	0.0200**	1.69 [0.0822]
UK	0.0404	0.2817*	0.1834*	0.2621***	0.2103***	0.2030***	0.2425***	0.3086***	0.4397***	0.4334***	0.4385***	1.15 [0.3239]
US	0.0158	−0.1093	−0.2190*	−0.2168*	−0.1083	0.0671	0.2200**	0.3137***	0.3598***	0.3888***	0.1675*	9.39 [0.0000]
Panel C: EPU coefficients α_epu
EA	−0.0625***	−0.0434***	−0.0343***	−0.0388***	−0.0379***	−0.0432***	−0.0423***	−0.0363***	−0.0279***	−0.0215***	−0.0199***	9.08 [0.0000]
Japan	0.0060	0.0056	−0.0105*	−0.0092*	−0.0088*	−0.0094*	−0.0109*	0.0035	0.0006	−0.0001	−0.0000	0.80 [0.6256]
UK	−5.7971***	−5.4694***	−5.0885***	−4.9765***	−4.9029***	−4.6028***	−4.5861***	−4.4474***	−3.3961***	−3.3852***	−3.4977***	3.21 [0.0007]
US	−0.0671***	−0.0734***	−0.0769***	−0.0780***	−0.0784***	−0.0706***	−0.0586***	−0.0473***	−0.0400***	−0.0289***	−0.0016***	20.66 [0.0000]

Monetary rule: it = α0(τ) + απ(τ)πt+12 + αy(τ)yt + αepu(τ)eput, where i_t is the end of month shadow interest rate, π_t₊₁₂ is the forward looking annualised inflation, y_t is the output gap, and epu_t is the economic policy uncertainty index. Instruments: 1–3 lags of inflation, output gap and epu. *, **, *** indicate statistical significance at 10%, 5% and 1% statistical levels, respectively. Wald statistic tests the null hypothesis of parameter equality across quantiles. IVQ regressions calculations use power series with k = 5. Figures in square brackets are p-values.

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Schlagwörter für diesen Artikel

advanced economies; conditional and unconditional quantile regressions; interest rate rule; shadow rate of interest; uncertainty; zero lower bound

Conventional and unconventional monetary policy reaction to uncertainty in advanced economies: evidence from quantile regressions

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