Gabor Pinter

Monetary Transmission Mechanism in the East African Community: An Empirical Investigation

Do changes in monetary policy affect inflation and output in the East African Community (EAC)? We find that (i) Monetary Transmission Mechanism (MTM) tends to be generally weak when using standard statistical inferences, but somewhat strong when using non-standard inference methods; (ii) when MTM is present, the precise transmission channels and their importance differ across countries; and (iii) reserve money and the policy rate, two frequently used instruments of monetary policy, sometimes move in directions that exert offsetting expansionary and contractionary effects on inflation - posing challenges to harmonization of monetary policies across the EAC and transition to a future East African Monetary Union. The paper offers some suggestions for strengthening the MTM in the EAC.

What do VARs Tell Us about the Impact of a Credit Supply Shock

This paper evaluates the performance of structural VAR models in estimating the impact of credit supply shocks. In a simple Monte-Carlo experiment, we generate data from a DSGE model that features bank lending and credit supply shocks and use SVARs to try and recover the impulse responses to these shocks. The experiment suggests that a proxy VAR that uses an instrumental variable procedure to estimate the impact of the credit shock performs well and is relatively robust to measurement error in the instrument. A structural VAR with sign restrictions also performs well under some circumstances. In contrast, VARs of the narrative variety, i.e. VAR models that include measures of the credit shock as endogenous variables are highly sensitive to ordering and measurement error. An application of the proxy VAR model and the VAR with sign restrictions to US data suggests, however, that the credit supply shock is hard to identify in practice.

Capital Over the Business Cycle: Renting Versus Ownership

We find that capital renting makes up one fifth of US capital expenditures, and it increases during downturns. Further, we present cross-country evidence that output losses after financial crises are smaller where renting is more prevalent. To understand these findings, we build a general equilibrium model with borrowing constraints and with the option to rent or buy capital. The countercyclicality of rentals occurs because their supply increases, as renting serves as an additional means of savings when credit markets malfunction. Moreover, demand also shifts towards rentals as they become relatively cheaper. By absorbing excess savings, renting mitigates financial crises.

House Prices and Job Losses

What explains the strong comovement between house prices and job losses over the UK business cycle? To study this question, I build a general equilibrium model with collateral constraints, endogenous job separation and housing shocks, and confront it with macroeconomic data via Bayesian methods. The results suggest that shocks to house prices (i) explain about 10-20% of output fluctuations and about 20%-30% of fluctuations in unemployment and job separation rates via the collateral channel, and (ii) were a major cause in triggering the 1990 and 2008 recessions in the United Kingdom.

Do contractionary monetary policy shocks expand shadow banking

Using vector autoregressive models with either constant or time-varying parameters and stochastic volatility for the United States, we find that a contractionary monetary policy shock has a persistent negative impact on the asset growth of commercial banks, but increases the asset growth of shadow banks and securitisation activity. To explain this ‘waterbed’ effect, we propose a standard New Keynesian model featuring both commercial and shadow banking, and we show that the model comes close to explaining the empirical results. Our findings cast doubt on the idea that monetary policy can usefully ‘get in all the cracks’ of the financial sector in a uniform way.

The Macroeconomic Shock with the Highest Price of Risk

I propose a new method of constructing a macroeconomic shock based on its ability to explain the cross-section of asset returns. The only identifying assumption is that this λ-shock demands the highest risk price per unit of exposure, or equivalently, minimises the associated sum of squared pricing errors, when pricing a given asset portfolio. When applying the method to the stock portfolios studied by Fama-French, a robust economic feature of the λ-shock is the delayed effect on aggregate quantities such as output and consumption and a sharp impact on the short-term interest rate and the term spread. The estimated λ-shock bears strong resemblance both with monetary policy shocks and with technology news shocks studied by the macroeconomic literature.