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The Role of Financial Depth on the Asymmetric Impact of Monetary Policy

Author

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  • Mustafa Caglayan

    (School of Management and Languages, Heriot-Watt University, UK)

  • Ozge Kandemir Kocaaslan

    (Department of Economics, Hacettepe University, Ankara, Turkey)

  • Kostas Mouratidis

    (Department of Economics, University of Sheffield, UK)

Abstract

This paper investigates the role of financial markets in evaluating the asymmetric impact of monetary policy on real output over the business cycle. We use quarterly US data which cover 1971:q1-2011:q4 and implement an instrumental variables Markov regime switching methodology to account for the endogeneity problem. Our investigation shows that monetary policy has a significant impact on output growth during recessions. More interestingly, we find that financial depth plays an important role as it dampens the effects of monetary policy in recessions. The results are robust compared to an alternative financial depth measure and a different sample period.

Suggested Citation

  • Mustafa Caglayan & Ozge Kandemir Kocaaslan & Kostas Mouratidis, 2013. "The Role of Financial Depth on the Asymmetric Impact of Monetary Policy," Working Papers 2013007, The University of Sheffield, Department of Economics.
    • Handle: RePEc:shf:wpaper:2013007
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    1. Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-1891, September.
    2. Raslan Alzubi & Mustafa Caglayan & Kostas Mouratidis, 2017. "The Risk-Taking Channel in the US: A GVAR Approach," Working Papers 2017009, The University of Sheffield, Department of Economics.
    3. Francesco Zanetti & Christoph Görtz & Wei Li & John Tsoukalas, 2020. "Vintage Article: The Effect of Monetary Policy Shocks in the United Kingdom: an External Instruments Approach," Economics Series Working Papers 812, University of Oxford, Department of Economics.

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    More about this item

    Keywords

    Output growth; asymmetric effects; monetary policy; financial depth; Markov switching; instrumental variables;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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