Title: A composite index for evaluating the stance of monetary policy
Authors: Laura Jackson Young - Bentley University (United States) [presenting]
Michael Owyang - Federal Reserve Bank of St Louis (United States)
David Wheelock - Federal Reserve Bank of St Louis (United States)
Abstract: The Federal Reserve's response to the financial crisis and the Great Recession involved a multi-instrument approach to monetary policy. In addition to lowering the federal funds target rate to nearly zero, the Fed also increased the size and changed the composition of the balance sheet, employed forward guidance, and targeted longer-term yields. Under the assumption that the federal funds target is the only (or at least primary) policy instrument, one can assess the effects of monetary policy by examining shocks to the fed funds rate. The use of multiple instruments has complicated models of monetary policy as one cannot simply consider the effects of a shock to a single variable. We develop an empirical model in which monetary policy is summarized by a single latent series. Our model uses a factor structure that can combine a variety of instruments. We adopt a version of the factor-augmented VAR (FAVAR) with time-varying loadings. Our assumption is that monetary policy, when properly measured, affects the economy linearly. However, the stance of policy is an agglomeration of a number of different measures with time-varying weights.