2. Comments on: Monetary Responses to the Financial Crisis of 2007-2008: The case for further action by Joseph Gagnon Stefan Gerlach University of Frankfurt

3. © Stefan Gerlach Paper does three things: 1.Provides a time line of the crisis responses. 2.Argues that QE policies have been effective. 3.Suggests that monetary policy is now too tight, particularly in the euro area (-4%). 4/17/2015 3

4. © Stefan Gerlach One comment … – Inherently difficult to assess effectiveness of QE: Policy interventions reduce spreads and promote liquidity. Rising spreads and falling liquidity trigger policy action. … and one quibble: – Taylor rule analysis can be misleading. – Rates in euro area at about or below the expected level. 4/17/2015 4

5. © Stefan Gerlach Taylor rules: – Poorly fitting models unlikely to provide plausible forecasts. Quarterly pre-EMU data (1984q2 – 2007q2). Fitted model uses output growth and consumption deflator. Large parameter on inflation (1.6) – Euro area models (e.g., Gerlach, IJCB, 2007): PMI. Headline inflation insignificant. Change in effective exchange rate. M3 growth (!) 4/17/2015 5

6. © Stefan Gerlach Real GDP and PMI 4/17/20156 © Stefan Gerlach

7. Measures of inflation 4/17/20157 © Stefan Gerlach

8. Two Empirical Taylor Rules Lagged interest rate Output growth PMIHead- line inf. “Core” inf. Eff. ex. rate M3Adj. R2 (changes) 1.0.860.260.360.61 (20.2)(7.12)(3.70) 2.0.940.060.15-0.020.040.83 (32.4)(7.25)(2.2)(4.1)(2.0) Dependent variable: 3-month interest rate. Sample period: 1999q1 – 2007q2. The model is i(t) = bi(t-1) + ax(t) + v(t); the adjusted R-squared is from the equivalent model i(t)-i(t-1) = (b-1)i(t-1) + ax(t) + v(t). 4/17/2015 8

9. © Stefan Gerlach Dynamic out-of-sample forecasts 4/17/2015 9

10. © Stefan Gerlach Preferred monthly model 4/17/201510 Sample: Jan 1999 – June 2007.