How Has the Monetary Transmission Mechanism Evolved Over Time?

Abstract

We discuss the evolution in macroeconomic thought on the monetary policy transmission mechanism and present related empirical evidence. The core channels of policy transmissionthe neoclassical links between short-term policy interest rates, other asset prices such as longterm interest rates, equity prices, and the exchange rate, and the consequent effects on household and business demand -have remained steady from early policy-oriented models (like the Penn-MIT-SSRC MPS model) to modern dynamic-stochastic-general-equilibrium (DSGE) models. In contrast, non-neoclassical channels, such as credit-based channels, have remained outside the core models. In conjunction with this evolution in theory and modeling, there have been notable changes in policy behavior (with policy more focused on price stability) and in the reduced form correlations of policy interest rates with activity in the United States. Regulatory effects on credit provision have also changed significantly. As a result, we review the empirical evidence on the changes in the effect of monetary policy actions on real activity and inflation and present new evidence, using both a relatively unrestricted factor-augmented vector autoregression (FAVAR) and a DSGE model. Both approaches yield similar results: Monetary policy innovations have a more muted effect on real activity and inflation in recent decades as compared to the effects before 1980. Our analysis suggests that these shifts are accounted for by changes in policy behavior and the effect of these changes on expectations, leaving little role for changes in underlying private-sector behavior (outside shifts related to monetary policy changes). 4 The classic reference is Jorgenson (1963).

Effects of Monetary and Macroprudential Policies on Financial Conditions: Evidence from the United States

“…Jorda et al (2015) show that a similar monetary policy shock decreases the house-prices to income ratio by about 4 percent after 4 years. Other studies also suggest that the impact of monetary policy shocks varies with the degree of bank-dependence (Ehrmann et al, 2003;Ciccarelli et al, 2014), the size of banks (Kashyap and Stein, 2000) and the quality of balance sheets of banks (Chen, 2001) and non-financial borrowers (Adrian and Shin, 2010;Boivin et al 2010).…”

Gimme a Break! Identification and Estimation of the Macroeconomic Effects of Monetary Policy Shocks in the U.S.

“…Di §erently, the dynamics of investments are still signiÖcant, but surrounded by a much larger uncertainty than in the pre-break scenario. The reaction of ináation shows no sign of the ëprice puzzleí, which appears to be, if anything, an evidence related to the ináationary events occurred in the 1970s, as also documented by a variety of authors (Hanson (2004), Boivin and Giannoni (2006), Castelnuovo and Surico (2010), Boivin, Kiley, and Mishkin (2010)). The response of the long-term rate, while still being positive and signiÖcant, turns out to be somewhat di §erent as for its dynamics, and it is also imprecisely estimated.…”

Macroeconomic transitions and the transmission mechanism: Evidence from Turkey

“…Much contemporary macroeconomic analysis focuses on the transmission mechanism (summarised in Christiano et al, 1999 andBoivin et al, 2010). This literature emphasises the complexity the transmission mechanism, which is seen as operating through many distinct channels.…”