The Effect of Credit Easing Shocks as an Auxiliary Tool of Monetary Policy on Macroeconomic Variables:Using the QUAL VAR Approach

Authors
Parviz Rostamzadeh
Elizabeth Soltani Shirazi
Rouhollah Shahnazi
Sakine Owjimehr
Shiraz University
Abstract
Unconventional monetary policies entered the field of economic discussions after the global financial crisis of 2008 and with the ineffectiveness of conventional monetary policies and have been considered with the aim of combating the reduction of money supply and economic recession. One of the important tools used to implement unconventional monetary policies is credit esing, which obviously does not have a quantitative value, and on the other hand, its prediction and impact on macroeconomic variables is of particular importance. In this research, the effect of the shocks resulting from the implementation of the credit easing policy on Iran's macroeconomic variables is investigated using the QUAL VAR method. In this way, using standard, simulated and quantified methods, the effect of credit easing policy shocks on macroeconomic variables during the years 2001 to 2022 is investigated using various tests. The results show that the impact of the mentioned policy shocks in the first months after the shock has caused a 0.04 percent decrease in the real GDP growth rate, a 0.01 percent increase in the inflation rate, and a 0.03 percent decrease in the employment rate and then in the following months, it will increase real GDP growth rate and employment rate. The mentioned shocks caused a 0.03 percent increase in the monetary base. Therefore, these applied shocks increase growth expectations. In general, the results show the fact that the policy of credit easing has led to an expansion in the assets side of the Central Bank's balance sheet, and by applying the necessary controls, it can be a suitable tool for stabilizing and growing macroeconomic variables in the months after its implementation and dealing with recessionary conditions.
Keywords
Unconventional monetary policy
credit easing
QUAL VAR
-Akovalı, U., & Yılmaz, K. (2021). Unconventional monetary policy and bond market connectedness in the new normal (No. 2101). Working Paper. Koç University-TÜSIAD Economic Research Forum (ERF), Istanbul
-Asshoff, S., Belke, A., & Osowski, T. (2021). Unconventional monetary policy and inflation expectations in the Euro area. Economic Modelling, 105564.
-Benford, J., Berry, S., Nikolov, K., Young, C., & Robson, M. (2009). Quantitative easing. Bank of England. Quarterly Bulletin, 49(2), 90.
-Bernanke, B. S. (2012, August). Monetary Policy since the Onset of the Crisis. In Federal Reserve Bank of Kansas City Economic Symposium, 31, 0-24.
-Borio, C., & Disyatat, P. (2010). Unconventional monetary policies: an appraisal. The Manchester School, 78, 53-89.
-Boivin, J., Kiley, M. T., & Mishkin, F. S. (2010). How has the monetary transmission mechanism evolved over time?. In Handbook of monetary economics, 3, 369-422.
-Bowman, D., Londono, J. M., & Sapriza, H. (2014). US unconventional monetary policy and contagion to emerging market economies. In 4th EMG Conference on Emerging Markets Finance.
-Bryant, R., Hooper, P., & Mann, C. L. (Eds.). (2010). Evaluating policy regimes: new research in empirical macroeconomics. Brookings Institution Press.
Carter, C. K., & Kohn, R. (1994). On Gibbs sampling for state space models. Biometrika, 81(3), 541-553.
-Chen, H., Chow, K., & Tillmann, P. (2017). The effectiveness of monetary policy in China: Evidence from a Qual VAR. China Economic Review, 43, 216-231.
-Chib, S. (2001). Markov chain Monte Carlo methods: computation and inference. Handbook of econometrics, 5, 3569-3649.
-Christensen, J. H., & Krogstrup, S. (2014). Swiss unconventional monetary policy: lessons for the transmission of quantitative easing. Federal Reserve Bank of San Francisco. Working Paper 2014-18.
-Christiano, L. J., Eichenbaum, M., & Evans, C. L. (1999). Monetary policy shocks: What have we learned and to what end?. Handbook of macroeconomics, 1, 65-148.
-Chodorow-Reich, G. (2014). Effects of unconventional monetary policy on financial institutions (No. w20230). National Bureau of Economic Research.
-Collard, F., Dellas, H., Diba, B., & Loisel, O. (2017). Optimal Monetary and Prudential Policies. American Economic Journal: Macroeconomics, 9(1), 40-87.
-Curdia, V., & Woodford, M. (2011). The central-bank balance sheet as an instrument of monetarypolicy. Journal of Monetary Economics, 58(1), 54-79.
- Dell’Ariccia, G., Rabanal, P., & Sandri, D. (2018). Unconventional monetary policies in the euro area, Japan, and the United Kingdom. Journal of Economic Perspectives, 32(4), 147-172.
-Doucet, A., Johansen, A. M., & Tadić, V. B. (2010). On solving integral equations using Markov chain Monte Carlo methods. Applied Mathematics and Computation, 216(10), 2869-2880.
-Dueker, M. (2005). Dynamic forecasts of qualitative variables: a Qual VAR model of US recessions. Journal of Business & Economic Statistics, 23(1), 96-104.
-Dueker, M., & Assenmacher-Wesche, K. (2010). Forecasting macro variables with a Qual VAR business cycle turning point index. Applied Economics, 42(23), 2909-2920.
-Eichengreen, B., Watson, M. W., & Grossman, R. S. (1985). Bank rate policy under the interwar gold standard: a dynamic probit model. The Economic Journal, 95(379), 725-745.
-Ellison, M., & Tischbirek, A. (2014). Unconventional government debt purchases as a supplement to conventional monetary policy. Journal of Economic Dynamics and Control, 43, 199-217.
-El-Shagi, M., & Von Schweinitz, G. (2016). Qual var revisited: good forecast, bad story. Journal of applied economics, 19(2), 293-321.
-Estrella, A., & Mishkin, F. S. (1998). Predicting US recessions: Financial variables as leading indicators. Review of Economics and Statistics, 80(1), 45-61.
Federal Reserve and Monetary Policy: All the Money in the Economy,2021
-Gaballo, G., & Marimon, R. (2021). Breaking the spell with credit-easing: self-confirming credit crises in competitive search economies. Journal of Monetary Economics, 119, 1-20.
-Gambacorta, L., Hofmann, B., & Peersman, G. (2014). The effectiveness of unconventional monetary policy at the zero lower bound: A cross‐country analysis. Journal of Money, Credit and Banking, 46(4), 615-642.
-Gelfand, A. E., & Smith, A. F. (1990). Sampling-based approaches to calculating marginal densities. Journal of the American statistical association, 85(410), 398-409.
-Gertler, M., & Karadi, P. (2011). A model of unconventional monetary policy. Journal of
monetary Economics, 58(1), 17-34.
-Giménez Roche, G. A., & Janson, N. (2019). From conventional to unconventional monetary policies: The failure of the market‐maker of last resort. The World Economy, 42(1), 296-317.
-Glebocki Keefe, H., Shadmanicor, H. (2018). Foreign exchange market intervention and asymmetric preferences. Emerging Markets Review , 37, 148-163.
-Goldberg,J., Klee,E., Edward Simpson Prescott,E.,& Wood,P., (2020). Monetary Policy Strategies and Tools: Financial Stability Considerations, Finance and Economics Discussion Series Divisions of Research & Statistics and Monetary A airs Federal Reserve Board, Washington, D.C.
-Gupta, R., & Wohar, M. (2017). Forecasting oil and stock returns with a Qual VAR using over 150 years off data. Energy Economics, 62, 181-186.
-Johansen,A.M.(2010). Markov Chain Monte Carlo. University of Warwick, Coventry, UK.
Joyce, M., Miles, D., Scott, A., & Vayanos, D. (2012). Quantitative easing and unconventional monetary policy–an introduction. The Economic Journal, 122(564), F271-F288.
-Klyuev, V., De Imus, P., & Srinivasan, K. (2009). Unconventional Choices for Unconventional Times Credit and Quantitative Easing in Advanced Economies1. IMF Staff Position Notes, 2009(027).
-Kortela, T., & Nelimarkka, J. (2020). The effects of conventional and unconventional monetary policy: identification through the yield curve. Bank of Finland Research Discussion Paper, (3).
-Leamer, E. E. (1983). Let's take the con out of econometrics. The American Economic Review, 73(1), 31-43.
- Lee, J., & Strazicich, M. C. (2003). Minimum Lagrange multiplier unit root test with two structural breaks. Review of economics and statistics, 85(4), 1082-1089.
- Lu, X., & White, H. (2014). Robustness checks and robustness tests in applied economics. Journal of econometrics, 178, 194-206.
-McCracken, M. W., McGillicuddy, J. T., & Owyang, M. T. (2021). Binary Conditional Forecasts. Journal of Business & Economic Statistics, 1-13.
-Meinusch, A., & Tillmann, P. (2015). Quantitative easing and tapering uncertainty: Evidence from Twitter (No. 09-2015). MAGKS Joint Discussion Paper Series in Economics.
-Meinusch, A., & Tillmann, P. (2016). The macroeconomic impact of unconventional monetary policy shocks. Journal of Macroeconomics, 47, 58-67.
- Miyao, R., & Okimoto, T. (2017). The macroeconomic effects of Japan's unconventional monetary policies. RIETI.
-Mishkin, F. S. (1996). The channels of monetary transmission: Lessons for monetary policy.
-Mishkin, F. S. (2019). The Economics of Money, Banking, and Financial Markets, Twelfth Edition. Pearson/Addison Wesley.
-Mouabbi, S., & Sahuc, J. G. (2019). Evaluating the macroeconomic effects of the ECB's unconventional monetary policies. Journal of Money, Credit and Banking, 51(4), 831-858.
-Neely, C. J. (2015). Unconventional monetary policy had large international effects. Journal of Banking & Finance, 52, 101-111.
-Ouerk, S., Boucher, C., & Lubochinsky, C. (2020). Unconventional monetary policy in the Euro Area: Shadow rate and light effets. Journal of Macroeconomics, 65, 103219.
-Petrovska, M., Krstevska, A., & Naumovski, N. (2016). Forecasting Macedonian business cycle turning points using Qual VAR model. Journal of Central Banking Theory and Practice, 5(3), 61-78.
-Resnik, P., & Hardisty, E. (2010). Gibbs sampling for the uninitiated. Maryland Univ College Park Inst for Advanced Computer Studies.