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THE CONVENTIONAL MONETARY POLICY AND TERM STRUCTURE OF INTEREST RATES DURING THE FINANCIAL CRISIS

Published online by Cambridge University Press:  17 July 2017

Tolga Cenesizoglu ,
Denis Larocque  and
Michel Normandin
Tolga Cenesizoglu*
Affiliation:
Alliance Manchester Business School and HEC Montréal
Denis Larocque
Affiliation:
HEC Montréal
Michel Normandin
Affiliation:
HEC Montréal
*
Address correspondence to: Tolga Cenesizoglu, Alliance Manchester Business School and HEC Montréal, 3000 Chemin de la Côte-Sainte-Catherine, Montreal, H3T 2A7, QC, CANADA; e-mail: tolga.cenesizoglu@hec.ca.
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Abstract

This paper analyzes whether the Fed had the ability through its conventional monetary policy to affect key economic and financial variables, and, in particular, the term structure of interest rates, during the recent financial crisis. This departs from the empirical literature that focuses mainly on the effectiveness of unconventional monetary policies during this episode, although these policies are appropriate only to the extent that the conventional policy was ineffective in the first place. Our identification strategy based on the conditional heteroskedasticity of the structural innovations allows us to specify a flexible structural vector auto-regressive process that relaxes the identifying assumptions commonly used in earlier studies. Comparing our results obtained from samples excluding and including the financial crisis, we find that the conventional monetary policy has lost its effectiveness shortly after the beginning of the financial turmoil. This result suggests that the Fed's use of unconventional policies was appropriate, at least, with the objective of changing the term structure of interest rates.

Keywords

Conventional Monetary PolicyTerm Structure of Interest RatesStructural Vector Auto-RegressionConditional HeteroskedasticityFinancial Crisis
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Issue 8 , December 2018 , pp. 2032 - 2069
Copyright
Copyright © Cambridge University Press 2017 

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