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Decomposing the monetary policy multiplier

Author

Listed:
  • Piergiorgio Alessandri

    (Bank of Italy)

  • Fabrizio Venditti

    (Bank of Italy)

  • Oscar JordÃ

    (Federal Reserve Bank of San Francisco and University of California, Davis)

Abstract

We show that financial markets play an important role in rendering the transmission of monetary policy shocks asymmetric in the US. Credit spreads only adjust to unexpected increases in interest rates, causing output and prices to respond more to a tightening than an expansion. The ‘financial multiplier’ of monetary policy – defined as the ratio between the cumulative responses of employment and credit spreads at the one-year horizon – is small and subject to significant estimation uncertainty for a monetary expansion, it is about -2 for a monetary tightening, and it reaches -4 for a monetary tightening that take place under tense credit market conditions.

Suggested Citation

  • Piergiorgio Alessandri & Fabrizio Venditti & Oscar JordÃ, 2023. "Decomposing the monetary policy multiplier," Temi di discussione (Economic working papers) 1422, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1422_23
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2023/2023-1422/en_tema_1422.pdf
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    References listed on IDEAS

    as
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    4. Gertler, Mark & Karadi, Peter, 2011. "A model of unconventional monetary policy," Journal of Monetary Economics, Elsevier, vol. 58(1), pages 17-34, January.
    5. Dario Caldara & Edward Herbst, 2019. "Monetary Policy, Real Activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 157-192, January.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    monetary policy; credit spreads; local projections; Kitagawa decomposition;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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