Economics Research Seminar Series 01-2020

Topic: Term Structure of Interest Rates and Monetary Policy Rules
Is the Non-Conventional Monetary Policy Effective at the Zero Lower Bound? By Dr Wali Ullah

Dr Wali Ullah is associate professor of Economics at Institute of Business Administration, Karachi. Dr Wali is an expert on macroeconomics and term structure modeling.

 

Abstract: The Taylor-type rules of optimal interest rate cannot be used to operate the monetary policy during the zero interest rate policy (ZIRP) period, because the short rate cannot be lowered further. Relying on the joint yields-macro latent factors model, this study empirically examines the effect of non-conventional monetary policy stances on term structure and the possible feed-back effect on the real as well as financial sectors using the Japanese experience of ZIRP and implementation of non-conventional policy instruments. The analysis indicates that it is the entire term structure that transmits the policy shocks to the real economy and financial markets rather than the yield spread only. The monetary policy signals pass through the yield curve level and slope factors to stimulate the economic activity. The curvature factor, besides reflecting the cyclical fluctuations of the economy, acts as a leading indicator for future inflation. In addition, policy influence tends to be low as the short end becomes segmented toward medium/long-term of the yield curve. Furthermore, the expectation hypothesis of the term structure does not hold during the ZIRP period (1999:02- 2015:12) as the estimated term premia vary considerably over time.

Date: 24 January 2020
Time: 11:30 AM
Venue: MCS 5, Aman CED Building, IBA, Karachi