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Pushing On a String: US Monetary Policy is Less Powerful in Recessions

Listed author(s):
  • Silvana Tenreyro
  • Gregory Thwaites

We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp1218.

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Date of creation: May 2013
Handle: RePEc:cep:cepdps:dp1218
Contact details of provider: Web page: http://cep.lse.ac.uk/_new/publications/series.asp?prog=CEP

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  24. Lo, Ming Chien & Piger, Jeremy, 2005. "Is the Response of Output to Monetary Policy Asymmetric? Evidence from a Regime-Switching Coefficients Model," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 37(5), pages 865-886, October.
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