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State dependence of monetary policy across business, credit and interest rate cycles

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  • Alpanda, Sami
  • Granziera, Eleonora
  • Zubairy, Sarah

Abstract

We study how phases of the business, credit and interest rate cycles affect the transmission of monetary policy using state-dependent local projection methods and data from 18 advanced economies. We find that the impact of monetary policy shocks on output and other macroeconomic and financial variables is weaker during periods of economic downturns, low household debt, and high interest rates. The business cycle state dependence tends to dominate the other documented state dependencies. We build a small-scale theoretical model to rationalize these facts. The model points to the presence of collateral and debt-service constraints on household borrowing and refinancing as potential drivers of state dependence of monetary policy with respect to the business, credit, and interest rate cycles. Our findings bear significant implications for the transmission of monetary policy, and highlight potentially important features to be considered in models used to inform monetary policy decisions.

Suggested Citation

  • Alpanda, Sami & Granziera, Eleonora & Zubairy, Sarah, 2021. "State dependence of monetary policy across business, credit and interest rate cycles," European Economic Review, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:eecrev:v:140:y:2021:i:c:s001429212100235x
    DOI: 10.1016/j.euroecorev.2021.103936
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    More about this item

    Keywords

    Monetary policy; Household debt; Local projections; State dependence;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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