Discussion of Nakamura and - PowerPoint Presentation

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Discussion of Nakamura and Steinsson’s“High Frequency Identification of Monetary Non-Neutrality”

ASSA Meetings, BostonJanuary 3, 2015

Eric T. Swanson

University of California, Irvine

What the Paper Does

1. Estimates impulse response functions of interest rates and inflation to an exogenous monetary policy shock.

2. Uses these impulse responses to estimate parameters of the CEE model by matching model impulse responses to empirical impulse responses.

Main contribution: Effects of monetary policy shocks are identified using modern methods:

high-frequency data

h

eteroskedasticity

(as in

Rigobon

2003

REStat

)

Identifying Effects of Monetary Policy Shocks

Canonical problem in empirical macro/monetary economics:

separate

exogenous

changes in monetary policy from

endogenous

responses of monetary policy to the economy.

Modern approach: use daily or intra-daily data on days of FOMC announcements

(

Kuttner

2001 JME;

Gurkaynak

, Sack, Swanson 2005 AER, 2005 IJCB)

s

ource: Gurkaynak, Sack, Swanson (2005 IJCB)

Identifying Effects of Monetary Policy Shocks

Identifying Effects of Monetary Policy Shocks

Canonical problem in empirical macro/monetary economics:

separate

exogenous

changes in monetary policy from

endogenous

responses of monetary policy to the economy.

Modern approach: use daily or intra-daily data on days of FOMC announcements

(

Kuttner

2001 JME;

Gurkaynak

, Sack, Swanson 2005 AER, 2005 IJCB)

C

aveat: some intermeeting FOMC announcements occurred in response to weak employment reports, so daily data can be endogenous.

s

ource: Gurkaynak, Sack, Swanson (2005 IJCB)

Identifying Effects of Monetary Policy Shocks

Identifying Effects of Monetary Policy Shocks

Canonical problem in empirical macro/monetary economics:

separate

exogenous

changes in monetary policy from

endogenous

responses of monetary policy to the economy.

Modern approach: use daily or intra-daily data on days of FOMC announcements

(

Kuttner

2001 JME;

Gurkaynak

, Sack, Swanson 2005 AER, 2005 IJCB)

C

aveat: some intermeeting FOMC announcements occurred in response to weak employment reports, so daily data can be endogenous.

Potential

endogeneity

problem is even greater for two-day event windows

(Gagnon,

Raskin

,

Remache

, Sack 2011 IJCB, Hanson and Stein 2012 FRBWP)

Identifying Effects of Monetary Policy Shocks

Two solutions to identification problem:

i

ntraday (tick) data

i

dentificaton

through

heteroskedasticity

(

Rigobon

2003

REStat

;

Rigobon

and Sack 2003 QJE, 2004 JME)

Nakamura and

Steinsson

use

both

of these methods.

However, there’s no incremental benefit to the

heteroskedasticity

identification, once you have tick data.

In fact,

heteroskedasticity

-based formulas could contaminate the estimates if non-FOMC

homoskedasticity

assumption is violated.

Identifying Effects of Monetary Policy Shocks

Unconditional

V

olatility of 6-month T-bill Yield, 1990-2013

Identifying Effects of Monetary Policy Shocks

Two solutions to identification problem:

i

ntraday (tick) data

i

dentificaton

through

heteroskedasticity

(

Rigobon

2003

REStat

;

Rigobon

and Sack 2003 QJE, 2004 JME)

Nakamura and

Steinsson

use

both

of these methods.

However, there’s no incremental benefit to the

heteroskedasticity

identification, once you have tick data.

In fact,

heteroskedasticity

-based formulas could contaminate the estimates if non-FOMC

homoskedasticity

assumption is violated.

Comment

#1: Marginal benefit of

heteroskedasticity

identification seems very low, given tick data

.

One-Dimensional Monetary Policy?

Traditionally

(

Kuttner

2001 JME;

Gurkaynak

, Sack, Swanson 2005 AER)

change in monetary policy = change in fed funds rate

More recent literature

(

Gurkaynak

, Sack, Swanson 2005 IJCB)

recognizes that monetary policy has two dimensions:

changes in federal funds rate

changes in forward guidance

Nakamura and

Steinsson

take one-dimensional approach, but

change

in monetary policy

≠

change in fed funds rate

change

in monetary policy ≠

change in

forward guidance

Instead, change in monetary policy is some unspecified average combination of the two.

One-Dimensional Monetary Policy?

s

ource: Gurkaynak, Sack, and Swanson (2005 IJCB)

One-Dimensional Monetary Policy?

Empirically, changes in fed funds rate and changes in forward guidance have different effects.

In DSGE models, changes in fed funds rate and changes in forward guidance also have different effects

contemporaneous

shock vs.

news

shock

In Nakamura and

Steinsson’s

DSGE model, monetary policy shocks are modeled in the traditional way—as a contemporaneous shock to the federal funds rate.

Comment #2: There’s a mismatch between the empirical impulse responses and the model’s impulse responses

they are conceptually not the same type of shock

model parameter estimates may be biased.

Risk Premia

Risk Premia

There’s some evidence that risk

premia

for very short-term yields are small and relatively stable at daily frequency

(

Piazzesi

and Swanson 2008 JME)

But for longer-term bonds, risk

premia

are larger on average and more volatile over time.

Nakamura and

Steinsson

consider some robustness checks:

Blue Chip forecasts

a

ffine term structure model

l

onger event-study windows

They conclude that the Expectations Hypothesis holds around FOMC announcements.

Comment #3: Does the EH hold around FOMC (and/or other major macroeconomic) announcements?

Summary of Comments

Given

tick

data, no need for

heteroskedasticity

-based identification

i

n fact,

heteroskedasticity

adjustment may contaminate estimates

Assumption of one-dimensional monetary policy is problematic

e

mpirical estimates are for an unspecified average of changes in fed funds rate and forward guidance

b

ut monetary policy in DSGE model is modeled as a pure change in fed funds rate—not the same thing!

Does the Expectations Hypothesis hold around FOMC (and other major macroeconomic) announcements?