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Monetary Policy Surprises, Credit Costs and Economic Activity

Listed author(s):
  • Mark Gertler
  • Peter Karadi

We provide evidence on the nature of the monetary transmission mechanism. To identify policy shocks in a setting with both economic and financial variables, we combine traditional monetary vector autoregression (VAR) analysis with high frequency identification (HFI) of monetary policy shocks. We first show that the shocks identified using HFI surprises as external instruments produce responses in output and inflation consistent with both textbook theory and conventional monetary VAR analysis. We also find, however, that monetary policy surprises typically produce "modest movements" in short rates that lead to "large" movements in credit costs and economic activity. The large movements in credit costs are mainly due to the reaction of both term premia and credit spreads that are typically absent from the standard model of monetary policy transmission. Finally, we show that forward guidance is important to the overall strength of the transmission mechanism.

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File URL: http://www.nber.org/papers/w20224.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 20224.

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Date of creation: Jun 2014
Publication status: published as Monetary Policy Surprises, Credit Costs and Economic Activity , Mark Gertler, Peter Karadi. in Lessons from the Financial Crisis for Monetary Policy , Gertler. 2015
Handle: RePEc:nbr:nberwo:20224
Note: AP EFG ME
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