Working Paper: CEPR ID: DP10083
Authors: Haroon Mumtaz; Paolo Surico
Abstract: Does the transmission of economic policies and structural shocks vary with the state of the economy? We answer this question using a strategy based on quantile regressions, which account for both endogeneous regressors and state-dependent parameters. An application to U.S. real activity and interest rate reveals pervasive asymmetries in the propagation mechanism of economic disturbances across good and bad times. During periods in which real activity is above its conditional average, the estimates of the degree of forward-lookingness and interest rate semi-elasticity are significantly larger (in absolute value) than the estimates associated with below-average periods. Results are robust to alternative estimation strategies to model state-dependent parameters.
Keywords: asymmetric transmission mechanism; consumption; state dependence
JEL Codes: E21; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher economic activity (R11) | enhanced effectiveness of monetary policy (E52) |
| high consumption output (E20) | more effective monetary policy (E52) |
| low economic activity (E29) | overestimation of forward-lookingness and interest rate semi-elasticity (E47) |
| high economic activity (O51) | underestimation of forward-lookingness and interest rate semi-elasticity (E43) |
| state-dependent parameters (C62) | dynamics of consumption and output (E20) |
| non-linear consumption-interest rate relationship (D15) | asymmetric effects over business cycle (E32) |