Volume 70, Issue 3 - Special Issue: Workshop on „Monetary and Financial Macroeconomics“, June 3–4, 2019, Hamburg

During the past decades, central bank independence has been increased in a large number of countries. However, even an independent central bank does not operate in a political vacuum. For instance, governments generally appoint political allies, presuming that consequently the central bank will follow policies that are in line with the governments’ preferences. The first part of this paper reviews recent research on whether the political ideology of the government has any impact on monetary policies pursued. It is argued that if forward-looking data are used to estimate Taylor-rule models for a panel of OECD countries that take country heterogeneity into account, there is no strong evidence for partisan effects on monetary policy. One of the reasons that central bank independence is no longer taken for granted is the acclaimed redistributive effects of monetary policy. The second part of the paper reviews recent research on the impact of conventional and unconventional monetary policy on income and wealth inequality. It is concluded that empirical research provides very mixed evidence on these issues and that it is not well connected to recent theoretical work.

In March 2015, the Eurosystem launched its QE programme. The asset purchases induced a rapid and strong increase in excess reserves, implying a structural liquidity surplus in the euro area banking sector. Against this background, the first part of this paper analyses the Eurosystem’s liquidity management during normal times , crisis times and times of too low inflation . With a focus on the latter, the second part of this paper develops a relatively simple theoretical model in which banks operate under a structural liquidity surplus. The model shows that increasing excess reserves have no or even a contractionary impact on bank loan supply. As the newly created excess reserves are heterogeneously distributed across euro area countries, the impact of QE on bank loan supply may differ across countries. Moreover, we derive implications for monetary policy implementation. Increases in the central bank’s main refinancing rate as well as in the minimum reserve ratio and decreases in the central bank’s deposit rate develop expansionary effects on loan supply – contrary to the case in which banks face a structural liquidity deficit.

Deriving a forward-looking Euler equation, this paper compares two fully identified non-linear versions. The difference (or bias) between them stems from an approximation by extracting parameters from the expectation values (Jensen’s inequality) as it is common practice in the literature. Furthermore, the model is completely identified using Consensus Forecasts data for the expectations, inflation-indexed bonds as a proxy for the long-run real interest rate, and estimates for the elasticity of intertemporal substitution. Regression analyses using data for three major economies reveal that the difference between the two Euler versions can be explained by uncertainty in the data itself and external uncertainty measures. The results confirm a connection between theoretical and empirical higher-order moments in economic models.