More Potent Monetary Policy? Insights from a Threshold Model
It has been argued that the effect of a change in the monetary policy interest rate on aggregate demand may be larger at higher levels of indebtedness through its impact on cash flows. However, the extent of credit constraints may be at least as important, if not more so. In particular, monetary policy could have a larger impact on aggregate demand when credit constraints are pervasive (which could be the case at low or high levels of indebtedness, or both). This paper examines the extent to which the strength of credit growth, which can be seen as a proxy for credit constraints, may affect the transmission of monetary policy in a way that cannot be captured in linear models. The results reveal that GDP growth is more responsive to interest rate shocks when credit growth is low. Separate models for household and business credit growth confirm this finding: consumption and business investment are more responsive to interest rate shocks when credit is growing slowly for the household and business sectors, respectively.
|Date of creation:||Jul 2007|
|Date of revision:|
|Contact details of provider:|| Postal: GPO Box 3947, Sydney NSW 2001|
Web page: http://www.rba.gov.au/
More information through EDIRC
|Order Information:||Web: http://www.rba.gov.au/forms/rdp-order-form/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Koop, Gary & Pesaran, M. Hashem & Potter, Simon M., 1996. "Impulse response analysis in nonlinear multivariate models," Journal of Econometrics, Elsevier, vol. 74(1), pages 119-147, September.
- Azariadis, Costas & Smith, Bruce, 1998. "Financial Intermediation and Regime Switching in Business Cycles," American Economic Review, American Economic Association, vol. 88(3), pages 516-36, June.
- Ming Chien Lo & Jeremy M. Piger, 2003.
"Is the response of output to monetary policy asymmetric? evidence from a regime-switching coefficients model,"
2001-022, Federal Reserve Bank of St. Louis.
- 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 865-86, October.
- Lanne, M. & Saikkonen, P., 2000.
"Threshold Autoregression for Strongly Autocorrelated Time Series,"
University of Helsinki, Department of Economics
489, Department of Economics.
- Lanne, Markku & Saikkonen, Pentti, 2002. "Threshold Autoregressions for Strongly Autocorrelated Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(2), pages 282-89, April.
- Nathan S. Balke, 2000. "Credit and Economic Activity: Credit Regimes and Nonlinear Propagation of Shocks," The Review of Economics and Statistics, MIT Press, vol. 82(2), pages 344-349, May.
- Weise, Charles L, 1999. "The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 85-108, February.
- Peersman, Gert & Smets, Frank, 2001. "Are the effects of monetary policy in the euro area greater in recessions than in booms?," Working Paper Series 0052, European Central Bank.
- James Peery Cover, 1992. "Asymmetric Effects of Positive and Negative Money-Supply Shocks," The Quarterly Journal of Economics, Oxford University Press, vol. 107(4), pages 1261-1282.
- Tomoya Suzuki, 2004. "Is the Lending Channel of Monetary Policy Dominant in Australia?," The Economic Record, The Economic Society of Australia, vol. 80(249), pages 145-156, 06.
- Alan S. Blinder, 1985.
"Credit Rationing and Effective Supply Failures,"
NBER Working Papers
1619, National Bureau of Economic Research, Inc.
- Leon Berkelmans, 2005. "Credit and Monetary Policy: An Australian SVAR," RBA Research Discussion Papers rdp2005-06, Reserve Bank of Australia.
- Sensier, Marianne & Osborn, Denise R & Ocal, Nadir, 2002.
" Asymmetric Interest Rate Effects for the UK Real Economy,"
Oxford Bulletin of Economics and Statistics,
Department of Economics, University of Oxford, vol. 64(4), pages 315-39, September.
- M Sensier & D R Osborn & N Öcal, 2002. "Asymmetric Interest Rate Effects for the UK Real Economy," Centre for Growth and Business Cycle Research Discussion Paper Series 10, Economics, The Univeristy of Manchester.
- Ellis W. Tallman & Nargis Bharucha, 2000. "Credit crunch or what? Australian banks during the 1986–93 credit cycle," Economic Review, Federal Reserve Bank of Atlanta, issue Q3, pages 13-34.
When requesting a correction, please mention this item's handle: RePEc:rba:rbardp:rdp2007-07. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Paula Drew)
If references are entirely missing, you can add them using this form.