Effects of US Monetary Policy Shocks during Financial Crises ― A Threshold Vector Autoregression Approach
59 Pages Posted: 10 May 2016
Date Written: May 8, 2016
Abstract
This paper analyzes the impact of monetary policy during periods of low and high financial stress in the US economy using a Threshold Vector Autoregression model. There is evidence that expansionary monetary policy is effective during periods of high financial stress with larger responses having a higher proportionate effect on output. The existence of a cost channel effect during periods of high financial stress implies the existence of a short run output-inflation trade off during financial crises. Large expansionary monetary shocks also increase the likelihood of moving the economy out of a high financial stress regime.
Keywords: Monetary Policy, Financial Stress, Threshold Vector Autoregression Models
JEL Classification: F44, E44, E52
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