529 - Does the Fed's unconventional monetary policy weaken the link between the financial and the real sector?

DNB Working Papers
Date 4 November 2016
After the global financial crisis, several central banks introduced unconventional monetary policies, such as QE. If QE increases asset prices, but does not boost the real economy to the same extent, the relationship between the financial and the real sector will weaken. This study investigates this issue for the US using the predictive power of the credit spread for future employment growth as measure for the strength of the real-financial link in a moving-window framework.  Our results suggest that the real-financial link is lower during bubbles and recessions. We also find that the relationship weakened after the Fed introduced QE.
  
Keywords: Financial-real Linkages, unconventional monetary policies, QE, Federal Reserve.
JEL Classifications: E22, G31, G32, D92.