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Unconventional monetary policy in a nonlinear quadratic model
Publikationstyp
Conference Paper
Date Issued
2020-12-01
Sprache
English
Author(s)
Volume
24
Issue
5
Article Number
20190099
Citation
Studies in Nonlinear Dynamics and Econometrics 24 (5): 20190099 (2020)
Publisher DOI
Scopus ID
After the financial market meltdown and the Great Recession of the years 2007-9, the financial market-macro link has become an important issue in monetary policy modeling. We develop a dynamic model that contains a nonlinear Phillips curve, a dynamic output equation, and a nonlinear credit flow equation - capturing the importance of credit cycles, risk premia, and credit spreads. Our Nonlinear Quadratic Model (NLQ) model has three dynamic state equations and a quadratic objective function. It can be used to evaluate the response of central banks to the Great Recession in moving from conventional to unconventional monetary policy. We solve the model with a new numerical procedure using estimated parameters for the euro area. We conduct simulations to explore the (de)stabilizing effects of the nonlinearities in the model. We demonstrate that credit flows, risk premia, and credit spreads play an important role as an amplification mechanism and in affecting the transmission of monetary policy. We thereby highlight the importance of the natural rate of interest as an anchor for a central bank target and the weight it places on the credit flows for the effectiveness of unconventional monetary policy. Our model is similar in structure compared to larger scale macro-econometric models which many central banks employ.
Subjects
credit cycles
credit spread
inflation targeting
NLQ model
nonlinear Phillips curve
RS-VAR
unconventional monetary policy
DDC Class
004: Computer Sciences
510: Mathematics
330: Economics