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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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Volume 24 (2020)

Unconventional monetary policy reaction functions: evidence from the US

Luca Agnello
  • University of Palermo, Department of Economics, Business and Statistics (SEAS), Viale delle Scienze, 90128 Palermo, Italy
  • Other articles by this author:
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/ Vitor CastroORCID iD: https://orcid.org/0000-0002-6426-6663 / Gilles Dufrénot
  • Aix-Marseille University, CNRS, EHESS, Centrale Marseille, AMSE, Château La Farge – Route des Milles, 13290 Aix-en-Provence Les Milles, France
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/ Fredj Jawadi / Ricardo M. Sousa
  • University of Minho, Department of Economics and Economic Policies Research Unit (NIPE), Campus of Gualtar, 4710-057 Braga, Portugal
  • London School of Economics and Political Science, LSE Alumni Association, Houghton Street, London WC2A 2AE, UK
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Published Online: 2019-11-08 | DOI: https://doi.org/10.1515/snde-2018-0088


We specify unconventional monetary policy reaction functions for the Fed using linear and nonlinear econometric frameworks. We find that nonstandard policy measures are largely driven by the dynamics of inflation and the output gap, with the effect being particularly strong during QE rounds. Moreover, we uncover the presence of asymmetry and regime dependence in central bank’s actions since the global financial crisis, especially concerning the response of the term spread and the shadow short rate to the growth rate of central bank reserves. From a policy perspective and given the lack of a systematic response of monetary policy to asset price growth in nonstandard times, our findings seem to corroborate the view that concerns about asset price bubbles, financial sector pro-cyclicality and systemic risk should be part of the macro-prudential policy toolkit.

Keywords: asset prices; central bank reserves; inflation; nonlinear models; output gap; shadow short rate; term spread; unconventional monetary policy reaction function

JEL Classification: E21; E43; E51; E53


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About the article

Published Online: 2019-11-08

Funding Source: Foundation for Science and Technology

Award identifier / Grant number: UID/ECO/03182/2019

AMSE is financed by French National Research Agency grant ANR-17-EURE-0020. NIPE is financed by National Funds of the FCT – Portuguese Foundation for Science and Technology within the project “UID/ECO/03182/2019”.

Citation Information: Studies in Nonlinear Dynamics & Econometrics, 20180088, ISSN (Online) 1558-3708, DOI: https://doi.org/10.1515/snde-2018-0088.

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