Back to Normal? Assessing the Effects of the Federal Reserve’s Quantitative Tightening
IHEID Working Paper 14-2024 [LATEST VERSION]
Abstract: We study the effects of the Federal Reserve's two Quantitative Tightening (QT) programs implemented over the last decade. We employ a high-frequency identification strategy to distinguish between conventional monetary policy shocks, Treasury borrowing announcement shocks, and balance-sheet unwinding. We analyse both QT operations and announcements. Our results show that QT operations, as long as they entail a decrease in the reserve supply, have a significant and persistent deflationary effect on interest rates and asset prices. A $1 trillion reduction in securities holdings by the Fed is associated with a 1.8 percentage point increase in 10-year Treasury yields. In contrast to operations, we find that QT announcements had limited effects on financial markets, except during the 2013 taper tantrum and select communications regarding QT II timing. While the contractionary impact of QT has so far been offset by changes in other components of the Fed's balance sheet that have kept the supply of reserves constant, our results suggest that balance sheet reductions entail, in principle, strong negative effects on financial markets. Therefore, although QT does not represent, in the policymakers' view, the primary tool for achieving price stability, it is still far from running quietly in the background of the monetary policy stance, and an appropriate balance sheet normalisation strategy must take these effects into account.
Credit Controls as a Monetary Policy Tool: Evidence from the Italian Experience (1973-1986) (in progress)
Abstract: This paper provides a quantitative evaluation of the direct credit controls used as a monetary policy tool by the Banca d'Italia between 1973 and 1986. Using archival data and a Structural Vector Autoregression, we jointly estimate the effects of a ceiling on bank loan growth and a floor on long-maturity security holdings, compared with conventional monetary policy, on output, prices, the trade balance, and bank credit. Both tools contracted output by magnitudes comparable to interest rate policy, but differed sharply in their price effects: the securities floor was disinflationary, while the credit ceiling generated stagflation due to supply-side disruptions from working capital constraints on small and medium-sized firms. Both credit control tools did not help improving the external balance, which was their primary stated objective, because credit restrictions depressed exports and imports symmetrically. On the other hand, conventional interest rate policy improved the trade balance without rationing export financing. These findings help explain why credit policy was phased out in the mid-1980s and provide insights for the design of modern macroprudential instruments targeting quantitative credit aggregates.
Credible Stabilizing Fiscal Policy: The Role of Macroframeworks (in progress), with M. Andrle, J. P. Ángel M., J. S. Corrales M. and A. Soler
Abstract: We use a structural macroeconomic model with households and firms forming informed expectations about future fiscal policies to investigate the macroeconomic and public finance implications of implementing different fiscal reaction functions and using diverse fiscal instruments to respond to shocks. Our results suggest that government’s reactions disregarding the cyclical stance of the economy and available fiscal space are costlier than more flexible alternatives. The analysis also shows how macroeconomic frameworks facilitate assessing the feasibility of fiscal objectives and quantifying the macroeconomic impacts of specific fiscal reaction functions and how using them as part of medium-term fiscal projections helps authorities communicate the stance of fiscal policy to the public, thereby achieving a better blend of flexibility and credibility.