Effects of unconventional monetary policy across U.S. industries

Date01 March 2020
DOIhttp://doi.org/10.1111/infi.12357
Published date01 March 2020
International Finance. 2020;23:104134.wileyonlinelibrary.com/journal/infi104
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© 2019 John Wiley & Sons Ltd
DOI: 10.1111/infi.12357
ORIGINAL ARTICLE
Effects of unconventional monetary policy
across U.S. industries
Edmond Berisha
Feliciano School of Business, Montclair
State University, Montclair, New Jersey
Correspondence
Edmond Berisha, Feliciano School of
Business, Montclair State University,
Montclair, NJ 07043.
Email: berishae@mail.montclair.edu
Abstract
Using industrylevel data for all U.S. states obtained
from the U.S. Bureau of Economic Analysis, this paper
examines the impact that unconventional monetary
policy has had on six U.S. industries. The results
indicate that the impact varies across the industries
analysed. The results show that total wages and salaries
increased the most in the finance sector. However,
the strongest impact on total real output was in the
wholesale sector.
1
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INTRODUCTION
To minimise the risks of the latest financial crisis to the U.S. economys economic and financial
stability, the Federal Reserve reduced the federal funds rate to zero and initiated largescale asset
purchases (LSAPs), also known as quantitative easing (QE). The Federal Reserve bought a wide
range of assets, such as longterm bonds issued to finance lending to companies and households
(Joyce et al., 2012).The aim was to signal that the policy interest ratewould remain at its effective
lower bound for an extended time, which would stimulate spending and reduce economic and
financial instability in the U.S. (Bernanke, 2017, p. 418; Weale and Wieladek, 2016).
The existing literature has mainly focused on the impact of unconventional monetary policy
on financial markets and real GDP. Overall, the literature suggests that unconventional
monetary policy was effective in supporting macroeconomic activity. Gambacorta, Leonardo,
and Peersman (2014) assess the macroeconomic impact of unconventional monetary policy
across eight advanced economies. They found that exogenous increases in centralbank balance
sheets were successful in improving the overall economic condition in countries that
implemented largescale asset purchases. They also performed individual country estimates,
which were qualitatively similar to the crosscountry estimates. Joyce et al. (2012), referring to
various theoretical and empirical studies, suggest that QE has been effective in supporting
economic growth. Similarly, Bhattarai and Neely (2016) review empirical studies on the effects
of U.S. unconventional monetary policy on both financial markets and the real economy. They
state that unconventional policies have had strong impacts on domestic and international asset
prices and were successful in averting deflation and output collapse. Further, U.S. QE shocks
have been shown to have significant impacts on financial variables in emerging economies.
Bhattarai, Chatterjee, and Park (2015) show that U.S. QE shocks led to an exchange rate
appreciation, a reduction in longterm bond yields, a stock market boom, and increase in capital
inflows to these countries. More recently, Inoue and Rossi (2018) tested if the transmission of
unconventional monetary policy in international financial markets has changed. They find that
the impact of monetary policy changes on a countrys nominal spot exchange rate is
qualitatively very similar across both conventional and unconventional periods. Specifically,
they document that monetarypolicy easing leads to a depreciation of the countrys spot
exchange rate.
This paper adds to the existing literature by analysing which U.S. industries were more
affected by unconventional monetary policy. In particular, I assess the effects of
unconventional monetary policy on total output and total wages and salaries ac ross the
NAICSclassified industries in U.S. states. This allows me to identify which sectors within
the U.S. economy have benefited the most from the Federal Reserveslargescale asset
purchases. I focus on the period since the beginning of the Great Recession, but I increase
the power of the empirical analysis by exploiting the U.S. crossstate dimension. From
Figures 1 and 2, we can see that, for each industry, there is some variation in total real
output and total wages and salaries across and within the 50 U.S. states. This allows for the
use of panel estimation techniques, which, in turn, permits me to improve the accuracy of
theanalysisandprovideevidenceonhowindustrylevel total real output and total wages
and salaries changed across and within states due to the Federal Reserveslargescale asset
purchases. Particularly, I estimate a paneldatamodelwithannualdataovertheyears
20082014.
1
Note that over this sample period, centralbank balance sheets became the
main policy instrument in the U.S. and other advanced economies (Gambacorta et al.,
2014). The sample includes all 50 U.S. states, and the list of industries analysed is shown
in Table 1. To account for any potential crossstate heterogeneity in the dynamics of
unconventional monetary policy measures, total wages and salaries, and real out put, a
mean group estimator, as documented in Pesaran and Smith (1995), is estimated.
The impact on total wages and salaries and real output across the individual industries is
examined by conditioning the effects on the state of the macroeconomy, on state and federal
government spending and, importantly, on financial turmoil and macroeconomic risks that are
proxied by implied stockmarket volatility. According to Gambacorta et al. (2014), conditioning
on these variables is important to disentangle the endogenous reaction of centralbank balance
sheets to overall U.S. macroeconomic and financial conditions.
The results confirm that easing of financial conditions from expansionary, unconven-
tional monetary policy had positive impacts on real output and wages and salaries across
U.S. industries. However, looking at the industry effects, it is clear that the magnitude of the
unconventional monetary policy effects varies across industries. The results show that total
wages and salaries in the finance sector responded relatively more to expansionary,
unconventional monetary policy changes. The size of the impact on total real output was the
strongest for the wholesale and retail sectors.
The remainder of the paper is organised as follows. In the next section, some stylised facts
about the U.S. economy and the Federal Reserves QE purchases are presented. Section 3
describes the data. Section 4 describes the panel model and presents the main results, and
Section 5 concludes.
BERISHA
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