Conventional Monetary Policy Transmission During Financial Crises: An Empirical Analysis

Tatjana Dahlhaus

36 citations0/0 files storedJournal of Applied Econometrics

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Monetary Policy and Economic Impact Banking stability, regulation, efficiency Economic theories and models

Abstract

Summary This paper studies the effects of a conventional monetary policy shock in the USA during times of high financial stress. The analysis is carried out by introducing a smooth transition factor model where the transition between states (‘normal’ and high financial stress) depends on a financial conditions index. Employing a quarterly dataset over the period 1970:Q1 to 2008:Q4 containing 108 US macroeconomic and financial time series, I find that a monetary policy shock during periods of high financial stress has stronger and more persistent effects on macroeconomic variables such as output, consumption and investment than it has during ‘normal’ times. Differences in effects among the regimes seem to originate from nonlinearities in both components of the credit channel, i.e. the balance sheet channel and the bank‐lending channel. Copyright © 2016 John Wiley & Sons, Ltd.

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References

2009The Impact of Uncertainty Shocks 1996Impulse response analysis in nonlinear multivariate models 1988Agency Costs, Net Worth, And Business Fluctuations 1995Inside the Black Box: The Credit Channel of Monetary Policy Transmission 1999Chapter 21 The financial accelerator in a quantitative business cycle framework 1994Monetary Policy, Business Cycles, and the Behavior of Small Manufacturing Firms 1996The Financial Accelerator and the Flight to Quality 2001Monetary policy surprises and interest rates: Evidence from the Fed funds futures market

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