Distributional Patterns in US Monetary Transmission: Quantile Cointegration Evidence

This study challenges the conventional assumption of uniform monetary policy transmission by examining interest rate pass-through across the conditional distribution using quantile cointegration. Using U.S. data from 1994–2024, we estimate long-run relationships between the federal funds rate and both lending rates and Treasury yields at quantiles 0.1–0.9, employing the Phillips–Hansen fully modified quantile estimator with quantile CUSUM stability tests. We find that transmission is fundamentally asymmetric and varies systematically with economic conditions. Under conventional policy measures, pass-through mechanisms display marked instability, with cointegration frequently breaking down in crisis periods when policy effectiveness is most crucial. The prime rate remains stably linked to the policy rate only at select quantiles, while Treasury yields show clear maturity-dependent patterns-medium-term maturities are generally more resilient than short- or long-term yields. Temporal robustness checks reveal that transmission was more unstable during the pre-Global Financial Crisis era than often assumed, but markedly more stable in the pre-COVID period, consistent with institutional learning and enhanced policy frameworks. Using the Wu-Xia shadow rate in place of the federal funds rate delivers complete stability for the prime rate and substantial stability gains for most Treasury maturities. This indicates that many breakdowns observed under conventional measures reflect policy-measurement limitations at the zero lower bound rather than genuine transmission failures. The results suggest central banks should adopt state-contingent frameworks that recognize transmission asymmetries and deploy unconventional tools proactively in stressed conditions.