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Monetary policy during financial crises: Is the transmission mechanism impaired?

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  • Jannsen, Nils
  • Potjagailo, Galina
  • Wolters, Maik H.

Abstract

We study the macroeconomic effects of monetary policy during financial crises using a Bayesian panel vector autoregressive (PVAR) model for 20 advanced economies. We interact all of the endogenous variables with financial crisis dummies, which are constructed using the narrative approach. We also distinguish between an acute initial phase of financial crises and a subsequent recovery phase. We show that an expansionary monetary policy shock has large positive effects on output and inflation during the acute phase of a financial crisis. These effects are larger than those during non-crisis periods. Decreased uncertainty as well as increases in consumer confidence and share prices explain these large effects, whereas these variables are much less relevant for monetary policy transmission outside financial crises. Counterfactual analysis shows that the transmission mechanism would be impaired without the effects of monetary policy on these variables, where credit would not react at all and the response of output would be substantially lower. During the recovery phase of a financial crisis, output and inflation are generally non-responsive to monetary policy shocks.

Suggested Citation

  • Jannsen, Nils & Potjagailo, Galina & Wolters, Maik H., 2015. "Monetary policy during financial crises: Is the transmission mechanism impaired?," Economics Working Papers 2015-04, Christian-Albrechts-University of Kiel, Department of Economics.
  • Handle: RePEc:zbw:cauewp:201504
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    Cited by:

    1. Jackson, Laura E. & Owyang, Michael T. & Zubairy, Sarah, 2018. "Debt and stabilization policy: Evidence from a Euro Area FAVAR," Journal of Economic Dynamics and Control, Elsevier, vol. 93(C), pages 67-91.
    2. Gern, Klaus-Jürgen & Hauber, Philipp & Potjagailo, Galina, 2015. "Zu den globalen Auswirkungen einer harten Landung der Konjunktur in China," IfW-Box 2015.12, Kiel Institute for the World Economy (IfW).
    3. Berg, Tim Oliver, 2019. "Business Uncertainty And The Effectiveness Of Fiscal Policy In Germany," Macroeconomic Dynamics, Cambridge University Press, vol. 23(4), pages 1442-1470, June.
    4. Chi Hyun Kim & Lars Other, 2019. "The Short-Run Effect of Monetary Policy Shocks on Credit Risk: An Analysis of the Euro Area," Discussion Papers of DIW Berlin 1781, DIW Berlin, German Institute for Economic Research.
    5. Karen Davtyan, 2016. "“The Distributive Effects of Conventional and Unconventional Monetary Policies”," IREA Working Papers 201606, University of Barcelona, Research Institute of Applied Economics, revised Apr 2016.
    6. Elena Pelinescu & Mihaela Simionescu, 2017. "The Effects of the Recent Economic and Financial Crisis on the Romanian Economy," Working papers 15, Research Association for Interdisciplinary Studies.
    7. Gustavo Adler & Carolina Osorio Buitron, 2017. "Tipping the Scale? The Workings of Monetary Policy through Trade," IMF Working Papers 17/142, International Monetary Fund.
    8. Rangan Gupta & Charl Jooste, 2018. "Unconventional monetary policy shocks in OECD countries: how important is the extent of policy uncertainty?," International Economics and Economic Policy, Springer, vol. 15(3), pages 683-703, July.
    9. Martin Feldkircher & Florian Huber, 2018. "Unconventional U.S. Monetary Policy: New Tools, Same Channels?," Journal of Risk and Financial Management, MDPI, Open Access Journal, vol. 11(4), pages 1-31, October.
    10. Jan Pablo Burgard & Matthias Neuenkirch & Matthias Nöckel, 2019. "State‐Dependent Transmission of Monetary Policy in the Euro Area," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(7), pages 2053-2070, October.
    11. OLTEANU, Dan, 2015. "Monetary Policy Effectiveness In Stimulating The Cees Credit Recovery," Studii Financiare (Financial Studies), Centre of Financial and Monetary Research "Victor Slavescu", vol. 19(3), pages 8-24.
    12. Llanto, Gilberto M., 2016. "Risks, Shocks, Building Resilience: Philippines," Research Paper Series DP 2016-09, Philippine Institute for Development Studies.
    13. Salomon Fiedler & Isabel Hanisch & Dr. Nils Jannsen Hanisch & Prof. Dr. Maik Wolters, 2017. "Effectiveness of Unconventional Monetary Policy in the Euro Area: An Assessment Based on a Literature Survey," Credit and Capital Markets, Credit and Capital Markets, vol. 50(4), pages 455-488.
    14. Claudio Borio & Boris Hofmann, 2017. "Is Monetary Policy Less Effective When Interest Rates Are Persistently Low?," RBA Annual Conference Volume (Discontinued), in: Jonathan Hambur & John Simon (ed.), Monetary Policy and Financial Stability in a World of Low Interest Rates, Reserve Bank of Australia.
    15. Valeriu Nalban, 2016. "Sentiment-Driven Asymmetries in Romanian Monetary Policy Transmission," Eastern European Economics, Taylor & Francis Journals, vol. 54(3), pages 251-270, May.
    16. Fiedler, Salomon & Gern, Klaus-Jürgen & Jannsen, Nils & Wolters, Maik H., 2019. "Growth prospects, the natural interest rate, and monetary policy," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy (IfW), vol. 13, pages 1-34.
    17. Martin Ademmer & Nils Jannsen, 2018. "Post-crisis business investment in the euro area and the role of monetary policy," Applied Economics, Taylor & Francis Journals, vol. 50(34-35), pages 3787-3797, July.
    18. Dovern, Jonas & Zuber, Christopher, 2017. "The Effect of Recessions on Potential Output Estimates: Size, Timing, and Determinants," Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168180, Verein für Socialpolitik / German Economic Association.
    19. Youngju Kim & Hyunjoon Lim, 2017. "Transmission of Monetary Policy in Times of High Household Debt," Working Papers 2017-35, Economic Research Institute, Bank of Korea.
    20. Klaus Wiener & Rolf Ketzler, 2016. "Versicherungswirtschaft und Niedrigzinsumfeld: Risiken, Nebenwirkungen und Anpassungsstrategien," Vierteljahrshefte zur Wirtschaftsforschung / Quarterly Journal of Economic Research, DIW Berlin, German Institute for Economic Research, vol. 85(1), pages 65-79.
    21. Karen Davtyan, 2016. "“The Distributive effects of conventional and unconventional monetary policies”," AQR Working Papers 201606, University of Barcelona, Regional Quantitative Analysis Group, revised Apr 2016.
    22. Llanto, Gilberto M., 2016. "Risks, Shocks, Building Resilience: Philippines," Discussion Papers DP 2016-09, Philippine Institute for Development Studies.
    23. Ademmer, Martin & Jannsen, Nils, 2018. "Post-crisis business investment in the euro area and the role of monetary policy," Open Access Publications from Kiel Institute for the World Economy 180839, Kiel Institute for the World Economy (IfW).

    More about this item

    Keywords

    monetary policy transmission; financial crisis; financial stability; state-dependence; uncertainty; panel VAR;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G01 - Financial Economics - - General - - - Financial Crises

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