BIS国际清算银行-The-reaction-function-channel-of-monetary-policy-and-the-financial-cycle_42页_3mb

Summary of BIS Working Paper No 816: The Reaction Function Channel of Monetary Policy and the Financial Cycle

Core Content

This working paper explores the role of the "reaction function channel" of monetary policy in influencing the financial cycle, specifically how the responsiveness of monetary policy to financial market imbalances affects their evolution over time. The paper distinguishes this channel from the "risk-taking channel", which focuses on the effect of interest rates on risk perception and tolerance.

Main Views

• Monetary policy reaction function is a mechanism through which central banks influence financial stability by adjusting policy rates in response to financial conditions.
• The reaction function channel operates by shaping market expectations of future policy actions, which in turn affect speculative behavior and financial risk-taking.
• The risk-taking channel is a narrower concept that focuses on the impact of current or expected interest rate levels on financial risk-taking, while the reaction function channel emphasizes the systematic and forward-looking nature of policy responses.
• The paper argues that the reaction function channel is a more cost-effective and systematic approach to managing financial cycles, as it relies on credible policy signals rather than solely on interest rate adjustments.

Key Information

1. Theoretical Foundations

• The reaction function channel can curb speculative demand by altering the set of possible equilibria.
• It can influence asset pricing by shaping expectations of future policy actions, which in turn affect the stochastic discount factor.
• It can also affect investor behavior directly by altering risk appetite and confidence, as reflected in behavioral finance models.

2. Empirical Strategy

• The paper employs a two-step empirical procedure:
  1. Estimating the time-varying Taylor rule to capture the apparent sensitivity of monetary policy to financial imbalances.
  2. Using local projections to assess the dynamic relationship between these sensitivities and the subsequent evolution of financial imbalances.

3. Measuring Financial Imbalances

• Financial imbalances are measured using bivariate regressions that compare financial variables (e.g., stock prices, housing prices, credit volumes) with their fundamental values.
• Real-time financial imbalances are based on current data, while ex post financial imbalances are derived from retrospective analysis.
• The paper highlights the importance of distinguishing between real-time and ex post measures to accurately assess the effectiveness of the reaction function channel.

4. Estimating the Policy Reaction Function

• The Taylor rule is estimated using rolling samples to capture time-varying policy responses.
• The policy rate is modeled as the nominal fed funds rate until 2009, and a shadow rate thereafter.
• Expected inflation and unemployment are estimated using the Survey of Professional Forecasters (SPF) median forecasts.
• The reaction function coefficients are estimated to reflect the apparent sensitivity of monetary policy to financial imbalances, with the aim of understanding how these sensitivities influence future financial developments.

5. Effects of the Reaction Function on Financial Cycles

• The paper finds that systematic countercyclical monetary policy (i.e., more responsive to financial imbalances) leads to a moderation of financial imbalances over time.
• This effect is robust to various control variables and alternative specifications.
• The reaction function channel is distinct from the risk-taking channel, as it operates through expectations rather than just interest rate levels.

Extensions and Robustness

• The paper explores the interaction between the reaction function channel and the risk-taking channel, suggesting that they may reinforce each other in both stabilizing and destabilizing ways.
• It also examines the role of a central bank put, the amplitude of boom-bust cycles, and the robustness of the findings to alternative measurement choices.
• The results are consistent with earlier studies and offer a more comprehensive analysis of the reaction function channel.

Conclusion

• The paper concludes that the reaction function channel is a crucial mechanism in shaping financial cycles.
• A clear communication of the policy reaction function is important for preventing excessive risk-taking and maintaining financial stability.
• The findings support the case for systematic leaning-against-the-wind monetary policies and emphasize the importance of expectations in financial stability.

References and Appendices

• The paper references key studies in the field, including Borio and Zhu (2008), Adrian and Shin (2010), and Jimenez et al (2012).
• It includes an appendix with detailed data definitions and additional analysis.

Figures

• Figure 1 shows the real-time and ex post financial imbalances for stock prices, housing prices, and credit volumes.
• The real-time measures are plotted in blue, and the ex post measures in circled red.
• The shaded area in the figure represents the actual asset prices and credit volumes.

Key Takeaways

• Monetary policy that is more countercyclical in its reaction to financial imbalances can help moderate financial cycles.
• The reaction function channel is a distinct and important mechanism that operates through expectations rather than just interest rates.
• The empirical results are robust and support the importance of systematic policy responses in maintaining financial stability.