Macroeconomic fundamentals and asset prices – state dependence and implications for the conduct of monetary policy

• Applicants: Professorin Dr. Kerstin Bernoth; Professor Dr. Helmut Herwartz
• Subject Area: Statistics and Econometrics ; Economic Policy, Applied Economics
• Term: from 2013 to 2022
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 243691359

• Final Report Year: 2024

Final Report Abstract

The global financial crisis challenged the understanding of macroand financial economists about the linkages between monetary policy (MP), the financial system and the real economy and the channels through which financial risks spill-over internationally. With a focus on the detection and effect analysis of MP signals the project has contributed to both econometric toolkit of structural VAR analysis and the literature on their transmission across macroeconomic aggregates (e.g. asset prices, real activity) and across international economies. Investigating the scope of independent component analysis (ICA) for SVARs identification we find that such components often feature sound economic properties and, hence, can be considered as exogenous structural shocks. Moreover, this avenue of econometric analysis is applicable in higher dimensional systems and has the potential to establish interesting panel perspectives of analysis (either by averaging or pooling). Pursuing data-based identification via ICA also has potential to assess the relevance and exogeneity of instrumental information that has been used in the literature for the detection of structural shocks. Effective MPs need to take account of conditions in financial markets and the real economy. While contractionary MP has the potential to (excessively) dampen asset valuations, MP is not neutral and the real economic effects of such a policy are significant. MP affects the reallocation of a firm’s share of labour and capital costs. MP shocks impact markedly on exchange rates, which is key to understand international spillovers via valuation effects, energy prices or risk premia.

Publications

• Better Off Without the Euro? A Structural VAR Assessment of European Monetary Policy. SSRN Electronic Journal (2020).
  Fritsche, Jan Philipp & Harms, Patrick
  
• Exchange rates, foreign currency exposure and sovereign risk. Journal of International Money and Finance, 117(2021, 10), 102454.
  Bernoth, Kerstin & Herwartz, Helmut
  
• The Term Structure of Currency Futures' Risk Premia. Journal of Money, Credit and Banking, 54(1), 5-38.
  BERNOTH, KERSTIN; VON HAGEN, JÜRGEN & DE VRIES, CASPER
  
• Zooming in on Monetary Policy - The Labor Share and Production Dynamics of Two Million Firms. SSRN Electronic Journal (2021).
  Fritsche, Jan Philipp & Steininger, Lea
  
• Proxy SVAR identification of monetary policy shocks - Monte Carlo evidence and insights for the US. Journal of Economic Dynamics and Control, 139(2022, 6), 104457.
  Herwartz, Helmut; Rohloff, Hannes & Wang, Shu
  
• The link between monetary policy, stock and house prices – Evidence from a statistical identification approach, International Journal of Central Banking, Vol. 18(5), pages 1-53
  Herwartz, H.; Maxand, S. & Rohloff, H.
  
• How certain are we about the role of uncertainty in the economy?. Economic Inquiry, 62(1), 126-149.
  Herwartz, Helmut & Lange, Alexander
  
• Monetary Policy and Mispricing in Stock Markets. Journal of Money, Credit and Banking, 56(7), 1887-1904.
  BECKERS, BENJAMIN & BERNOTH, KERSTIN
  
• Point estimation in sign-restricted SVARs based on independence criteria with an application to rational bubbles. Journal of Economic Dynamics and Control, 151(2023, 6), 104630.
  Herwartz, Helmut & Wang, Shu
  
• The Energy-Price Channel of (European) Monetary Policy. SSRN Electronic Journal (2023).
  Ider, Gökhan; Kriwoluzky, Alexander; Kurcz, Frederik & Schumann, Ben
  
• The Impacts of Global Risk and US Monetary Policy on US Dollar Exchange Rates and Excess Currency Returns. SSRN Electronic Journal (2023).
  Bernoth, Kerstin; Herwartz, Helmut & Trienens, Lasse
  
• Statistical identification in panel structural vector autoregressive models based on independence criteria. Journal of Applied Econometrics, 39(4), 620-639.
  Herwartz, Helmut & Wang, Shu