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Does the Transmission of Monetary Policy Shocks Change when Inflation is High?

Author

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  • Canova, Fabio
  • Pérez Forero, Fernando J.

Abstract

We investigate the transmission of US monetary policy shocks in high and low inflation regimes using a Bayesian threshold vector autoregressive model. The propagation of conventional disturbances differs: the peak response of output growth and inflation is smaller, but the effects lasts longer when inflation is high. Liquidity shocks are more expansionary when inflation is high. The reaction of financial markets to the shocks accounts for the differences. Implications for theoretical models are discussed.

Suggested Citation

  • Canova, Fabio & Pérez Forero, Fernando J., 2026. "Does the Transmission of Monetary Policy Shocks Change when Inflation is High?," CEPR Discussion Papers 21339, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:21339
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    File URL: https://cepr.org/publications/DP21339
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    Keywords

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    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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