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Time variation in U.S. monetary policy and credit spreads

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  • Huang, Yu-Fan

Abstract

Through the lens of the Taylor rule, this paper is concerned with the circumstances in which the Fed would change its behavior. A Bayesian MCMC method is proposed to deal with a switching Taylor rule robust to zero lower bound and heteroscedasticity. The posterior results from Markov-switching Taylor rule indicate that, first, there is strong evidence for an “active” regime in which the Fed responses to output gap aggressively. Second, the movements in the posterior probability of the active regime is highly correlated with credit spreads. I then use a switching Taylor rule with transition probabilities connected to credit spreads to show that the positive correlation is strongly supported by data, implying that the Fed responses to output gap more strongly when the credit spreads rise.

Suggested Citation

  • Huang, Yu-Fan, 2015. "Time variation in U.S. monetary policy and credit spreads," Journal of Macroeconomics, Elsevier, vol. 43(C), pages 205-215.
    • Handle: RePEc:eee:jmacro:v:43:y:2015:i:c:p:205-215
    DOI: 10.1016/j.jmacro.2014.11.005
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    References listed on IDEAS

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    1. Hurn Stan & Johnson Nicholas & Silvennoinen Annastiina & Teräsvirta Timo, 2022. "Transition from the Taylor rule to the zero lower bound," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 26(5), pages 635-647, December.

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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