State‐Dependent Transmission of Monetary Policy in the Euro Area

Abstract

We estimate a logit mixture vector autoregressive model describing monetary policy transmission in the euro area over the period 1999–2015. In contrast to other classes of nonlinear vector autoregressive models, regime affiliation is neither strictly binary, nor binary with a transition period, and based on multiple variables. We show that monetary policy transmission in the euro area can be described as a mixture of two states. In both states, output and prices are found to decrease after contractionary monetary policy shocks. However, the effects of monetary policy are less enduring in the “crisis state.”

The Financial Accelerator in the Euro Area: New Evidence Using a Mixture VAR Model

“…We overcome this shortfall by utilizing a mixture VAR (Burgard et al 2019) that assumes the co-existence of two states with time-varying weights. 4 In contrast to other classes of non-linear VAR models, the regime affiliation is neither strictly binary nor binary with a transition period.…”

“…In addition, we also utilize a submodel -that is simultaneously estimated with the VAR models for both states -to examine and understand the economic reasons for the time-varying weights. Burgard et al (2019) extend the models of Fong et al (2007) and Kalliovirta et al (2016) by introducing a logit submodel similar to Thompson et al (1998) to obtain the state weights. Based on their approach, we employ a logit mixture VAR with two states:…”

“…Against this background, our paper addresses the question to what extent changes in the quantity, quality, and risk of credit -that typically occur over the business cycle -act as a financial accelerator (Bernanke et al 1996) and amplify macroeconomic fluctuations in the euro area during the period 2003Q1-2019Q4. 2 We employ a novel empirical methodology, a mixture vector autoregressive (VAR) modelà la Burgard et al (2019) that assumes the co-existence of two states of the economy (e.g., a normal state and a crisis state) with time-varying weights. In contrast to other classes of non-linear VARs, the regime af-filiation is neither strictly binary, nor binary with a transition period, and based on multiple variables.…”

“…Following Burgard et al (2019), we remove the linear trends of all variables before employing these in the mixture VAR model. According to an augmented Dickey-Fuller (1979) test, the null hypothesis of a unit root can be rejected for all detrended series except the unemployment rate.…”

“…Further details on the estimation procedure and the derivation of impulse responses can be found inBurgard et al (2019).…”