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Measuring the Non-Linear Effects of Monetary Policy

Author

Listed:
  • Christian Matthes

    (Federal Reserve Bank of Richmond)

  • Regis Barnichon

    (CREI)

Abstract

This paper proposes a method to identify the non-linear effects of structural shocks by using Gaussian basis functions to parametrize impulse response functions. We apply our approach to monetary policy and find that the effect of a monetary intervention depends strongly on (i) the sign of the intervention, (ii) the size of the intervention, and (iii) the state of the business cycle at the time of the intervention. A contractionary policy has a strong adverse effect on output, much stronger than linear estimates suggest, but an expansionary policy has, on average, no significant effect on output. An expansionary policy can have some expansionary effect on output, but only if the intervention is large and during a recession. Even so, a contractionary policy is always more potent than its expansionary counterpart.

Suggested Citation

  • Christian Matthes & Regis Barnichon, 2015. "Measuring the Non-Linear Effects of Monetary Policy," 2015 Meeting Papers 49, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:49
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    References listed on IDEAS

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    Cited by:

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    2. Jackson, Laura E. & Owyang, Michael T. & Soques, Daniel, 2018. "Nonlinearities, smoothing and countercyclical monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 95(C), pages 136-154.
    3. World Bank, 2021. "Global Economic Prospects, January 2021," World Bank Publications - Books, The World Bank Group, number 34710.
    4. Brignone, Davide & Gambetti, Luca & Ricci, Martino, 2024. "Geopolitical risk shocks: when the size matters," Working Paper Series 2972, European Central Bank.
    5. Johnson Worlanyo Ahiadorme, 2022. "Monetary policy transmission and income inequality in Sub-Saharan Africa," Economic Change and Restructuring, Springer, vol. 55(3), pages 1555-1585, August.
    6. Dalibor Stevanovic, 2015. "Factor augmented autoregressive distributed lag models with macroeconomic applications," CIRANO Working Papers 2015s-33, CIRANO.
    7. de Ridder, M. & Pfajfar, D., 2017. "Policy Shocks and Wage Rigidities: Empirical Evidence from Regional Effects of National Shocks," Cambridge Working Papers in Economics 1717, Faculty of Economics, University of Cambridge.
    8. Hussain, Syed M. & Malik, Samreen, 2016. "Asymmetric Effects of Exogenous Tax Changes," Journal of Economic Dynamics and Control, Elsevier, vol. 69(C), pages 268-300.
    9. Francisco RUGE-MURCIA, 2014. "Indirect Inference Estimation of Nonlinear Dynamic General Equilibrium Models : With an Application to Asset Pricing under Skewness Risk," Cahiers de recherche 15-2014, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
    10. Mr. Luis Ignacio Jácome & Tahsin Saadi Sedik & Alexander Ziegenbein, 2018. "Is Credit Easing Viable in Emerging and Developing Economies? An Empirical Approach," IMF Working Papers 2018/043, International Monetary Fund.
    11. Barnichon, Regis & Matthes, Christian, 2015. "Stimulus versus Austerity: The Asymmetric Government Spending Multiplier," CEPR Discussion Papers 10584, C.E.P.R. Discussion Papers.

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