This paper studies how monetary policy jointly affects asset prices and the real economy in the United States. To this end, I develop an estimator that uses high-frequency surprises as a proxy for the structural monetary policy shocks. This is achieved by integrating the surprises into a vector autoregressive model as an exogenous variable.I show analytically that this approach identifies the true relative impulse responses.When allowing for time-varying model parameters, I find that, compared to output, the response of stock and house prices to monetary policy shocks was particularly low before the 2007-09 financial crisis.

This paper studies how monetary policy jointly affects asset prices and the real economy in the United States. I develop an estimator that uses high-frequency surprises as a proxy for the structural monetary policy shocks. This is achieved by integrating the surprises into a vector autoregressive model as an exogenous variable. I use current short-term rate surprises because these are least affected by an information effect.When allowing for time-varying model parameters, I find that, compared to the response of output, the reaction of stock and house prices to monetary policy shocks was particularly low before the 2007-09 financial crisis.Second, I find that stock and house prices show substantial time-variation to unanticipated changes in monetary policy. While the response of stock prices does not show a systematic pattern, the response of house prices strongly comoves with the level of house prices over most of the sample.They are less responsive when house prices are high, and more responsive when prices are low.Third, I find that, compared to output, the response of stock and house prices was particularly low before the Great Recession. Hence, attempts by the Federal Reserve to lean against the house price boom before the crisis may have been less effective.Apart from the application in this paper, the exogenous variable approach can generally be applied when a proxy for the structural shock of interest is available. In this regard, the method is an alternative implementation of the external instrument or proxy SVAR approach, introduced by Stock and Watson (2012) and Mertens and Ravn (2013). 5,6 Gertler and Karadi (2015) and Caldara and Herbst (2016) apply this method in the context of monetary policy identification.Both approaches consistently estimate the true relative impulse responses and I provide analytical derivations with respect to their equivalence. However, they use the proxy differently; once as an exogenous variable and the other time as an external instrument. In a comparison of these two methods, the exogenous variable approach allows for the simple extension with time-varying parameters since the VAR is estimated in a single step. In addition, I also compare the exogenous variable approach with the local projection instrumental variable approach (LP-IV), as proposed by Stock and Watson (2018) among others. 7The response of stock prices to monetary policy news (e.g, Bernanke and Kuttner, 2005, Rigobon andSack, 2004) or macroeconomic news more generally (e.g., Law, Song, and Yaron, 2017) is well explored in the literature. However, the relation is typically analyzed by the immediate response within a narrow window around news releases. 8 In contrast, this paper identifies the dynamic response of stock prices to monetary policy shocks. The reaction of house prices to monetary policy shocks is less explored, but interest in this question increased after the 2007-09 financial crisis. Kuttner (2013) provides an overview of the empirical findings.Last, I focus on the response of asset prices to ...

Aggregate bank lending to firms expands following a number of adverse macroeconomic shocks, such as the outbreak of COVID-19 or a monetary policy tightening. Using loan-level supervisory data, we show that these dynamics are driven by draws on credit lines by large firms. Banks that experience larger drawdowns restrict term lending more-an externality onto smaller firms. Using a structural model, we show that credit lines are necessary to reproduce the flow of credit toward less constrained firms after adverse shocks. While credit lines increase total credit growth, their redistributive effects exacerbate the fall in investment.

We investigate the transmission of monetary policy to household consumption using detailed administrative data on the universe of households in Norway. Based on a novel series of identified monetary policy shocks, we estimate the dynamic responses of consumption, income, and saving along the liquid asset distribution of households.We find that low-liquidity but also high-liquidity households show strong responses, interest rate changes faced by borrowers and savers feed into consumption, and indirect effects of monetary policy outweigh direct effects, albeit with a delay. Overall, the results support the importance of financial frictions, cash-flow channels, and heterogeneous effects of monetary policy.

To understand the determinants of financial crises, previous research focused on developments closely related to financial markets. In contrast, this paper considers changes originating in the real economy as drivers of financial instability. To this end, I assemble a novel data set of long-run measures of income inequality, productivity, and other macrofinancial indicators for advanced economies. I find that rising top income inequality and low productivity growth are robust predictors of crises, and their slowmoving trend components largely explain these relations. Moreover, recessions that are preceded by such developments are deeper than recessions without such ex-ante trends.