Working Paper: CEPR ID: DP18166
Authors: Piergiorgio Alessandri; Oscar Jorda; Fabrizio Venditti
Abstract: Financial markets play an important role in generating monetary policy transmission asymmetries in the US. Credit spreads only adjust to unexpected increases in interest rates, causing output and prices to respond more to a monetary tightening than to an expansion. At a one year horizon, the ‘financial multiplier’ of monetary policy—defined as the ratio between the cumulative responses of employment and credit spreads—is zero for a monetary expansion, -2 for a monetary tightening, and -4 for a monetary tightening that takes place under strained credit market conditions. These results have important policy implications: the central bank may inadvertently over-tighten in times of financial uncertainty.
Keywords: Monetary Policy; Credit Spreads; Local Projections; Kitagawa Decomposition
JEL Codes: C13; C32; E32; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Monetary policy shocks (E39) | Asset prices (G19) |
| Monetary policy shocks (E39) | Output (Y10) |
| Monetary policy shocks (E39) | Inflation (E31) |
| Monetary tightening (E52) | Financial multiplier (G19) |
| Strained credit conditions (E51) | Financial multiplier (G19) |
| Unexpected increases in interest rates (E43) | Credit spreads (G12) |
| Monetary loosening (E49) | Credit spreads (G12) |
| Monetary tightening (E52) | Excess bond premium (G12) |
| Monetary shocks (E39) | Credit spreads (G12) |