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Comments on: Monetary Responses to the Financial Crisis of 2007-2008: The case for further action by Joseph Gagnon Stefan Gerlach University of Frankfurt.

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Presentation on theme: "Comments on: Monetary Responses to the Financial Crisis of 2007-2008: The case for further action by Joseph Gagnon Stefan Gerlach University of Frankfurt."— Presentation transcript:

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2 Comments on: Monetary Responses to the Financial Crisis of : The case for further action by Joseph Gagnon Stefan Gerlach University of Frankfurt

3 © Stefan Gerlach Paper does three things: 1.Provides a time line of the crisis responses. 2.Argues that QE policies have been effective. 3.Suggests that monetary policy is now too tight, particularly in the euro area (-4%). 4/17/2015 3

4 © Stefan Gerlach One comment … – Inherently difficult to assess effectiveness of QE: Policy interventions reduce spreads and promote liquidity. Rising spreads and falling liquidity trigger policy action. … and one quibble: – Taylor rule analysis can be misleading. – Rates in euro area at about or below the expected level. 4/17/2015 4

5 © Stefan Gerlach Taylor rules: – Poorly fitting models unlikely to provide plausible forecasts. Quarterly pre-EMU data (1984q2 – 2007q2). Fitted model uses output growth and consumption deflator. Large parameter on inflation (1.6) – Euro area models (e.g., Gerlach, IJCB, 2007): PMI. Headline inflation insignificant. Change in effective exchange rate. M3 growth (!) 4/17/2015 5

6 © Stefan Gerlach Real GDP and PMI 4/17/20156 © Stefan Gerlach

7 Measures of inflation 4/17/20157 © Stefan Gerlach

8 Two Empirical Taylor Rules Lagged interest rate Output growth PMIHead- line inf. “Core” inf. Eff. ex. rate M3Adj. R2 (changes) (20.2)(7.12)(3.70) (32.4)(7.25)(2.2)(4.1)(2.0) Dependent variable: 3-month interest rate. Sample period: 1999q1 – 2007q2. The model is i(t) = bi(t-1) + ax(t) + v(t); the adjusted R-squared is from the equivalent model i(t)-i(t-1) = (b-1)i(t-1) + ax(t) + v(t). 4/17/2015 8

9 © Stefan Gerlach Dynamic out-of-sample forecasts 4/17/2015 9

10 © Stefan Gerlach Preferred monthly model 4/17/ Sample: Jan 1999 – June 2007.


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