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Monetary Policy Surprises, Credit Costs, and Economic Activity

Listed author(s):
  • Peter Karadi

    (European Central Bank)

  • Mark Gertler

    (New York University)

We provide evidence on the transmission of monetary policy shocks in a setting with both economic and financial variables. We first show that shocks identified using high frequency surprises around policy announcements as external instruments produce responses in output and in inflation that are typical in monetary VAR analysis. We also find, however, that the resulting "modest" movements in short rates lead to "large" movements in credit costs, which are due mainly to the reaction of both term premia and credit spreads. Finally, we show that forward guidance is important to the overall strength of policy transmission.

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File URL: https://economicdynamics.org/meetpapers/2015/paper_447.pdf
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Paper provided by Society for Economic Dynamics in its series 2015 Meeting Papers with number 447.

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Date of creation: 2015
Handle: RePEc:red:sed015:447
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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