IDEAS home Printed from
   My bibliography  Save this paper

A Threshold Model of Monetary Policy


  • Michael D. Bradley & Dennis W. Jansen

    () (George Washington University public)


Identification of the monetary policy process is of ongoing interest to both economists and private sector agents. Econometricians have used a variety of tools to identify which macroeconomic variables stimulate a change in monetary policy and to estimate the magnitude and timing of the response. The overwhelming majority of these attempts are both linear and symmetric, assuming that Federal Reserve response to macroeconomic conditions is the same in expansions in contractions. In addition, most of the literature assumes a simple and unchanging dynamic response in the policy variable to changes in the economy. Consequently it has been difficult for econometricians to find a structural monetary policy equation that accurately represents policy responses over wide range of economic conditions. The result is application of a variety of dummy variable and period-splitting analyses in an attempt to control for variations in the policy response. In this paper, we use a smooth-transition threshold model to extend this literature. This model identifies the threshold values for key variables, like inflation and unemployment, at which monetary policy becomes more active and the estimates both the active period dynamics and the transition process into and out of that period. This latter function provides a direct estimation of the degree of interest rate smoothing without the need for assuming and ad hoc “concern†for smooth rates. For example, the threshold model accounts for a moderate Federal Reserve response to changes in inflation in low inflation periods and a more rapid and larger response in high inflation periods. A similar analysis can be done for the unemployment rate. Finally, we test to see if monetary policy operates under different dynamics during periods of “stagflation†in which both the inflation rate and the unemployment rate is high. Finally, we estimate the degree to which monetary policy response is asymmetric. We explicitly estimate whether increases and decreases in key variables like inflation and unemployment lead to monetary policy responses of equal magnitude and timing.

Suggested Citation

  • Michael D. Bradley & Dennis W. Jansen, 2005. "A Threshold Model of Monetary Policy," Computing in Economics and Finance 2005 380, Society for Computational Economics.
  • Handle: RePEc:sce:scecf5:380

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    More about this item


    Monentary Policy; Non-linear Dynamic Model;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes


    Access and download statistics


    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:sce:scecf5:380. 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: (Christopher F. Baum). General contact details of provider: .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.