IDEAS home Printed from https://ideas.repec.org/p/fau/wpaper/wp2013_18.html
   My bibliography  Save this paper

Explaining the Strength and the Efficiency of Monetary Policy Transmission: A Panel of Impulse Responses from a Time-Varying Parameter Model

Author

Listed:
  • Jakub Mateju

    (CERGE-EI, Prague and Czech National Bank)

Abstract

This paper analyzes both the cross-sectional and time variation in aggregate monetary policy transmission from nominal short term interest rates to price level. Using Bayesian TVP-VARs where the structural interest rate shocks are identi_ed by sign restrictions, we show that monetary policy transmission became stronger over the last decades. This applies both to developed and emerging economies. Monetary policy sacrifice ratios (the output costs of disination induced by monetary policy tightening) gradually decreased from their peak in the 1980's. Exploring the cross-country and time variation in panel regressions, we show that when a country adopted ination targeting regime, monetary transmission became stronger (by about 0.8 p.p. of price level response to 1 p.p. shock to the policy rate) and sacrifice ratios decreased. In periods of banking crises, the transmission from monetary policy interest rate shocks to prices is weaker (by about 1 p.p. of price level response to a 1 p.p. shock to the policy rate) and the related costs in output are higher. Further, countries with higher domestic credit to GDP have stronger transmission while countries with higher foreign debt seem to be less inuenced by domestic monetary policy.

Suggested Citation

  • Jakub Mateju, 2013. "Explaining the Strength and the Efficiency of Monetary Policy Transmission: A Panel of Impulse Responses from a Time-Varying Parameter Model," Working Papers IES 2013/18, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Nov 2013.
  • Handle: RePEc:fau:wpaper:wp2013_18
    as

    Download full text from publisher

    File URL: http://ies.fsv.cuni.cz/sci/publication/show/id/4952/lang/cs
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Fabio Canova & Luca Gambetti & Evi Pappa, 2007. "The Structural Dynamics of Output Growth and Inflation: Some International Evidence," Economic Journal, Royal Economic Society, vol. 117(519), pages 167-191, March.
    2. Jeffery D. Amato & Stephen Morris & Hyun Song Shin, 2002. "Communication and Monetary Policy," Oxford Review of Economic Policy, Oxford University Press, vol. 18(4), pages 495-503.
    3. Tobias Adrian & Hyun Song Shin, 2009. "Prices and Quantities in the Monetary Policy Transmission Mechanism," International Journal of Central Banking, International Journal of Central Banking, vol. 5(4), pages 131-142, December.
    4. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    5. Rafiq, M.S. & Mallick, S.K., 2008. "The effect of monetary policy on output in EMU3: A sign restriction approach," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1756-1791, December.
    6. Jordi Galí & Mark Gertler, 2007. "Macroeconomic Modeling for Monetary Policy Evaluation," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 25-46, Fall.
    7. Marek Jarocinski, 2010. "Responses to monetary policy shocks in the east and the west of Europe: a comparison," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(5), pages 833-868.
    8. Fabio Canova & Matteo Ciccarelli, 2009. "Estimating Multicountry Var Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 50(3), pages 929-959, August.
    9. Efrem Castelnuovo, 2012. "Monetary Policy Neutrality: Sign Restrictions Go to Monte Carlo," "Marco Fanno" Working Papers 0151, Dipartimento di Scienze Economiche "Marco Fanno".
    10. Renée Fry & Adrian Pagan, 2011. "Sign Restrictions in Structural Vector Autoregressions: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 49(4), pages 938-960, December.
    11. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, Oxford University Press, vol. 119(1), pages 1-48.
    12. Morgan, Julian & Locarno, Alberto & Vallés, Javier & Berben, Robert-Paul, 2004. "Cross-country differences in monetary policy transmission," Working Paper Series 400, European Central Bank.
    13. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
    14. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    15. Babecký, Jan & Havránek, Tomáš & Matějů, Jakub & Rusnák, Marek & Šmídková, Kateřina & Vašíček, Bořek, 2014. "Banking, debt, and currency crises in developed countries: Stylized facts and early warning indicators," Journal of Financial Stability, Elsevier, vol. 15(C), pages 1-17.
    16. Philip Liu & Konstantinos Theodoridis, 2012. "DSGE Model Restrictions for Structural VAR Identification," International Journal of Central Banking, International Journal of Central Banking, vol. 8(4), pages 61-95, December.
    17. Tomas Havranek & Marek Rusnak, 2013. "Transmission Lags of Monetary Policy: A Meta-Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 39-76, December.
    18. Aysun, Uluc & Brady, Ryan & Honig, Adam, 2013. "Financial frictions and the strength of monetary transmission," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 1097-1119.
    19. Robert A. Mundell, 1962. "The Appropriate Use of Monetary and Fiscal Policy for Internal and External Stability," IMF Staff Papers, Palgrave Macmillan, vol. 9(1), pages 70-79, March.
    20. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    21. Koop, Gary & Korobilis, Dimitris, 2010. "Bayesian Multivariate Time Series Methods for Empirical Macroeconomics," Foundations and Trends(R) in Econometrics, now publishers, vol. 3(4), pages 267-358, July.
    22. Ignazio Angeloni & Anil K. Kashyap & Benoit Mojon & Daniele Terlizzese, 2003. "Monetary Transmission in the Euro Area: Does the Interest Rate Channel Explain it All?," NBER Working Papers 9984, National Bureau of Economic Research, Inc.
    23. Bernanke, Ben S. & Gertler, Mark & Gilchrist, Simon, 1999. "The financial accelerator in a quantitative business cycle framework," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 21, pages 1341-1393, Elsevier.
    24. Carlstrom, Charles T & Fuerst, Timothy S, 1997. "Agency Costs, Net Worth, and Business Fluctuations: A Computable General Equilibrium Analysis," American Economic Review, American Economic Association, vol. 87(5), pages 893-910, December.
    25. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    26. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    27. Canova, Fabio & Nicolo, Gianni De, 2002. "Monetary disturbances matter for business fluctuations in the G-7," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1131-1159, September.
    28. Michael Ehrmann & Leonardo Gambacorta & Jorge Mart�nez-Pag�s & Patrick Sevestre & Andreas Worms, 2001. "Fynancial Systems and the Role of Banks in Monetary Policy Transmission in the Euro area," Temi di discussione (Economic working papers) 432, Bank of Italy, Economic Research and International Relations Area.
    29. Georgiadis, Georgios, 2014. "Towards an explanation of cross-country asymmetries in monetary transmission," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 66-84.
    30. Elbourne, Adam & de Haan, Jakob, 2006. "Financial structure and monetary policy transmission in transition countries," Journal of Comparative Economics, Elsevier, vol. 34(1), pages 1-23, March.
    31. Michael Ehrmann, 2000. "Comparing monetary policy transmission across European countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(1), pages 58-83, March.
    32. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
    33. Neuenkirch, Matthias, 2013. "Monetary policy transmission in vector autoregressions: A new approach using central bank communication," Journal of Banking & Finance, Elsevier, vol. 37(11), pages 4278-4285.
    34. Canova, Fabio & Paustian, Matthias, 2011. "Business cycle measurement with some theory," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 345-361.
    35. Koop, Gary & Leon-Gonzalez, Roberto & Strachan, Rodney W., 2009. "On the evolution of the monetary policy transmission mechanism," Journal of Economic Dynamics and Control, Elsevier, vol. 33(4), pages 997-1017, April.
    36. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    37. Ignazio Angeloni & Michael Ehrmann, 2003. "Monetary transmission in the euro area: early evidence [‘Micro effects of macro announcements: real-time price discovery in foreign exchange’]," Economic Policy, CEPR;CES;MSH, vol. 18(37), pages 469-501.
    38. Matteo Ciccarelli & Alessandro Rebucci, 2001. "The Transmission Mechanism of European Monetary Policy: Is There Heterogeneity? Is It Changing Over Time?," Working Papers 0115, Banco de España.
    39. repec:pri:cepsud:161blinder is not listed on IDEAS
    40. Giorgio E. Primiceri, 2005. "Time Varying Structural Vector Autoregressions and Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 821-852.
    41. Scholl, Almuth & Uhlig, Harald, 2008. "New evidence on the puzzles: Results from agnostic identification on monetary policy and exchange rates," Journal of International Economics, Elsevier, vol. 76(1), pages 1-13, September.
    42. Ehrmann, Michael & Backé, Peter, 2003. "Monetary policy transmission in the euro area: any changes after EMU?," Working Paper Series 240, European Central Bank.
    43. Prachi Mishra & Peter J Montiel & Antonio Spilimbergo, 2012. "Monetary Transmission in Low-Income Countries: Effectiveness and Policy Implications," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 60(2), pages 270-302, July.
    44. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    45. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    46. Mojon, Benoît & Peersman, Gert, 2001. "A VAR description of the effects of monetary policy in the individual countries of the euro area," Working Paper Series 92, European Central Bank.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Tomas Adam & Robert Ambrisko & Oxana Babecka Kucharcukova & Jan Babecky & Sona Benecka & Jan Bruha & Vilma Dingova & Dana Hajkova & Tomas Holub & Eva Hromadkova & David Kocourek & Lubos Komarek & Zlat, 2014. "Analyses of the Czech Republic's Current Economic Alignment with the Euro Area 2014," Occasional Publications - Edited Volumes, Czech National Bank, number as14 edited by Kamila Kulhava & Jakub Mateju, January.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Jakub Matějů, 2019. "What Drives the Strength of Monetary Policy Transmission?," International Journal of Central Banking, International Journal of Central Banking, vol. 15(3), pages 59-87, September.
    2. Emanuele Bacchiocchi & Efrem Castelnuovo & Luca Fanelli, 2014. "Gimme a break! Identification and estimation of the macroeconomic effects of monetary policy shocks in the U.S," "Marco Fanno" Working Papers 0181, Dipartimento di Scienze Economiche "Marco Fanno".
    3. Michal Franta & Roman Horvath & Marek Rusnak, 2014. "Evaluating changes in the monetary transmission mechanism in the Czech Republic," Empirical Economics, Springer, vol. 46(3), pages 827-842, May.
    4. Andrea Silvestrini & Andrea Zaghini, 2015. "Financial shocks and the real economy in a nonlinear world: a survey of the theoretical and empirical literature," Questioni di Economia e Finanza (Occasional Papers) 255, Bank of Italy, Economic Research and International Relations Area.
    5. Lutz Kilian, 2013. "Structural vector autoregressions," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 22, pages 515-554, Edward Elgar Publishing.
    6. Belongia, Michael T. & Ireland, Peter N., 2016. "The evolution of U.S. monetary policy: 2000–2007," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 78-93.
    7. Cross, Jamie, 2019. "On the reduced macroeconomic volatility of the Australian economy: Good policy or good luck?," Economic Modelling, Elsevier, vol. 77(C), pages 174-186.
    8. Ester Faia, 2007. "Financial Differences and Business Cycle Co‐Movements in a Currency Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(1), pages 151-185, February.
    9. Tim Oliver Berg, 2015. "Technology News and the US Economy: Time Variation and Structural Changes," Scottish Journal of Political Economy, Scottish Economic Society, vol. 62(3), pages 227-263, July.
    10. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    11. Mayer, Eric & Rüth, Sebastian & Scharler, Johann, 2016. "Total factor productivity and the propagation of shocks: Empirical evidence and implications for the business cycle," Journal of Macroeconomics, Elsevier, vol. 50(C), pages 335-346.
    12. Castelnuovo, Efrem, 2016. "Modest macroeconomic effects of monetary policy shocks during the great moderation: An alternative interpretation," Journal of Macroeconomics, Elsevier, vol. 47(PB), pages 300-314.
    13. Florian Huber & Gregor Kastner & Martin Feldkircher, 2016. "Should I stay or should I go? A latent threshold approach to large-scale mixture innovation models," Papers 1607.04532, arXiv.org, revised Jul 2018.
    14. Alessio Volpicella, 2019. "SVARs Identification through Bounds on the Forecast Error Variance," Working Papers 890, Queen Mary University of London, School of Economics and Finance.
    15. Prüser, Jan, 2021. "The horseshoe prior for time-varying parameter VARs and Monetary Policy," Journal of Economic Dynamics and Control, Elsevier, vol. 129(C).
    16. Aymeric Ortmans, 2020. "Evolving Monetary Policy in the Aftermath of the Great Recession," Documents de recherche 20-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    17. Georgiadis, Georgios, 2015. "Examining asymmetries in the transmission of monetary policy in the euro area: Evidence from a mixed cross-section global VAR model," European Economic Review, Elsevier, vol. 75(C), pages 195-215.
    18. Maas, Daniel & Mayer, Eric & Rüth, Sebastian, 2015. "Current account dynamics and the housing boom and bust cycle in Spain," W.E.P. - Würzburg Economic Papers 94, University of Würzburg, Department of Economics.
    19. Marek Rusnak & Tomas Havranek & Roman Horvath, 2013. "How to Solve the Price Puzzle? A Meta-Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 37-70, February.
    20. K. Istrefi & B. Vonnak, 2015. "Delayed Overshooting Puzzle in Structural Vector Autoregression Models," Working papers 576, Banque de France.

    More about this item

    Keywords

    monetary policy transmission; TVP-VAR; sign-restrictions;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fau:wpaper:wp2013_18. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Natalie Svarcova (email available below). General contact details of provider: https://edirc.repec.org/data/icunicz.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.