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Private Sector Debt, Financial Constraints, and the Effects of Monetary Policy: Evidence from the US

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  • Max Breitenlechner
  • Johann Scharler

Abstract

We characterize the response of U.S. real GDP to monetary policy shocks conditional on the level of private sector debt and the degree to which financial constraints are binding. To incorporate state‐dependent effects of monetary policy, we use the local projection framework. We find that although the amount of private sector debt potentially weakens the monetary policy transmission mechanism, policy shocks exert substantially larger effects on output when high private debt coincides with binding financial constraints.

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  • Max Breitenlechner & Johann Scharler, 2020. "Private Sector Debt, Financial Constraints, and the Effects of Monetary Policy: Evidence from the US," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 82(4), pages 889-915, August.
  • Handle: RePEc:bla:obuest:v:82:y:2020:i:4:p:889-915
    DOI: 10.1111/obes.12349
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