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Monetary Policy Transmission during Financial Crises: An Empirical Analysis

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  • Tatjana Dahlhaus

Abstract

This paper studies the effects of a monetary policy expansion in the United States during times of high financial stress. The analysis is carried out by introducing a smooth transition factor model where the transition between states (“normal” and high financial stress) depends on a financial conditions index. Employing a quarterly data set over the period 1970Q1 to 2009Q2 containing 108 U.S. macroeconomic and financial time series, I find that a monetary policy shock during periods of high financial stress has stronger and more persistent effects on macroeconomic variables such as output, consumption, and investment than it has during “normal” times. Differences in effects among the regimes seem to originate from non-linearities in the credit channel.

Suggested Citation

  • Tatjana Dahlhaus, 2014. "Monetary Policy Transmission during Financial Crises: An Empirical Analysis," Staff Working Papers 14-21, Bank of Canada.
  • Handle: RePEc:bca:bocawp:14-21
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    References listed on IDEAS

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    1. Forni, Mario & Giannone, Domenico & Lippi, Marco & Reichlin, Lucrezia, 2009. "Opening The Black Box: Structural Factor Models With Large Cross Sections," Econometric Theory, Cambridge University Press, vol. 25(05), pages 1319-1347, October.
    2. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics,in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
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    Cited by:

    1. Jannsen, Nils & Potjagailo, Galina & Wolters, Maik H., 2015. "Monetary policy during financial crises: Is the transmission mechanism impaired?," Kiel Working Papers 2005, Kiel Institute for the World Economy (IfW).
    2. repec:rba:rbaacv:acv2017-04 is not listed on IDEAS
    3. Galvão, Ana B. & Owyang, Michael T., 2014. "Financial stress regimes and the macroeconomy," Working Papers 2014-20, Federal Reserve Bank of St. Louis, revised 01 Dec 2016.
    4. Llanto, Gilberto M., 2016. "Risks, Shocks, Building Resilience: Philippines," Discussion Papers DP 2016-09, Philippine Institute for Development Studies.
    5. Pu Chen & Willi Semmler, 2017. "Financial Stress, Regime Switching and Spillover Effects: Evidence from a Multi-Regime Global VAR Model," Working Papers 1708, New School for Social Research, Department of Economics.
    6. Claudio Borio & Boris Hofmann, 2017. "Is Monetary Policy Less Effective When Interest Rates Are Persistently Low?," RBA Annual Conference Volume,in: Jonathan Hambur & John Simon (ed.), Monetary Policy and Financial Stability in a World of Low Interest Rates Reserve Bank of Australia.
    7. Andrew Filardo & Jouchi Nakajima, 2018. "Effectiveness of unconventional monetary policies in a low interest rate environment," BIS Working Papers 691, Bank for International Settlements.
    8. Jakub Janus, 2016. "The Transmission Mechanism Of Unconventional Monetary Policy," Oeconomia Copernicana, Institute of Economic Research, vol. 7(1), pages 7-21, March.
    9. OLTEANU, Dan, 2015. "Monetary Policy Effectiveness In Stimulating The Cees Credit Recovery," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 19(3), pages 8-24.
    10. Andrew Filardo & Pierre Siklos, 2018. "The cross-border credit channel and lending standards surveys," BIS Working Papers 723, Bank for International Settlements.
    11. Llanto, Gilberto M., 2016. "Risks, Shocks, Building Resilience: Philippines," Research Paper Series DP 2016-09, Philippine Institute for Development Studies.
    12. Pierre Guérin & Danilo Leiva-Leon, 2017. "Monetary policy, stock market and sectoral comovement," Working Papers 1731, Banco de España;Working Papers Homepage.

    More about this item

    Keywords

    Econometric and statistical methods; Financial markets; Transmission of monetary policy;

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G01 - Financial Economics - - General - - - Financial Crises

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