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Monetary Policy Surprises, Credit Costs and Economic Activity

In: Lessons from the Financial Crisis for Monetary Policy

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  • Mark Gertler
  • Peter Karadi

Abstract

We provide evidence on the transmission of monetary policy shocks in a setting with both economic and financial variables. We first show that shocks identified using high frequency surprises around policy announcements as external instruments produce responses in output and in inflation that are typical in monetary VAR analysis. We also find, however, that the resulting "modest" movements in short rates lead to "large" movements in credit costs, which are due mainly to the reaction of both term premia and credit spreads. Finally, we show that forward guidance is important to the overall strength of policy transmission.
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Suggested Citation

  • Mark Gertler & Peter Karadi, 2013. "Monetary Policy Surprises, Credit Costs and Economic Activity," NBER Chapters, in: Lessons from the Financial Crisis for Monetary Policy, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:13306
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    More about this item

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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