The Transmission Mechanism in Good and Bad Times

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 endogenous regressors and state-dependent parameters. An application to U.S. real activity and interest rate reveals pervasive asymmetries in the propagation mechanism across good and bad times. During periods when 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 strategies to model state-dependent parameters. . 2 Although recent advances have made it possible to solve structural models that feature a zero bound for the nominal interest rate (see Fernández-Villaverde et al., 2012), we are not aware of contributions that have estimated this type of nonlinearity in the context of a DSGE model. 1237 C (2015) by the

Uncertainty and Monetary Policy in Good and Bad Times

“…Our empirical Öndings, which highlight the role of the systematic component of monetary policy, are consistent with those by Aastveit, Natvik, and Sola (2013), Tenreyro and Thwaites (2013), Pellegrino (2014), and Mumtaz and Surico (2014), who also Önd monetary policy to be less powerful in periods of high uncertainty or, more generally, during recessions. In particular, Mumtaz and Surico (2014) show that the reduced-form coe¢cients of the U.S. aggregate demand schedule are state dependent, i.e., when real activity is above its conditional average, the degree of forward-lookingness and the interest rate semi-elasticity are signiÖcantly larger than the values estimated when real activity is below average.…”

“…Theoretical models like the one developed by Vavra (2014) and empirical investigations as those by Aastveit, Natvik, and Sola (2013), Tenreyro and Thwaites (2013), Mumtaz and Surico (2014), and Pellegrino (2014) Appendix of "Uncertainty and Monetary Policy in Good and Bad Times" by Giovanni Caggiano, Efrem Castelnuovo, Gabriela Nodari First, this Appendix documents statistical evidence in favor of a nonlinear relationship between the endogenous variables included in our STVAR. Next, it o §ers details on the estimation procedure of our non-linear VARs.…”

“…Aastveit, Natvik, and Sola (2013), Tenreyro and Thwaites (2013), and Pellegrino (2014) focus on the potentially nonlinear e §ects of uncertainty on monetary policy e §ectiveness and Önd monetary policy shocks to be less powerful in stabilizing real activity in presence of high uncertainty. Given that uncertainty is typically high in bad times, related results are those provided by Mumtaz and Surico (2014), who Önd that periods of slack are associated to a lower impact on consumption by real interest rate movements due to the lower intertemporal elasticity of substitution and degree of foward-lookingness of the IS curve. These Öndings o §er support to Vavraís (2014) previously mentioned theoretical model.…”

“…In particular, Mumtaz and Surico (2014) show that the reduced-form coe¢cients of the U.S. aggregate demand schedule are state dependent, i.e., when real activity is above its conditional average, the degree of forward-lookingness and the interest rate semi-elasticity are signiÖcantly larger than the values estimated when real activity is below average. This implies that, all else being equal, monetary policy is more powerful in good than in bad times.…”

Uncertainty and the Great Recession

“… There is also an important strand of the literature that investigates the effect of changes in the volatility of monetary policy shocks on macroeconomic outcomes, see Mumtaz and Zanetti (), Mumtaz and Surico (), and Mumtaz and Theodoridis (). …”