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Cross-country differences in the effects of monetary policy shocks on output and prices and their determinants

Author

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  • Yim, Geunhyung
  • Nah, Seungho
  • Oh, Daun

Abstract

On the basis of a sample of 19 countries and using sign-restricted VAR and second-stage regression, this research investigates whether there exist differences in the effects of monetary shocks on output and prices between countries, and, if any, which country characteristics incur such differences. The VAR analysis shows that monetary policy shocks of the same magnitude generate differences in terms of the effects on output and prices between countries. The maximal responses of industrial production indexes to a 25-basis-point shock policy rate cut range from a decrease to an over 3% increase with an average of about 1–2% increase. Those of consumer price indexes range from 0.3% to around a 2% increase, with an average of 0.9% increase. The results from regression analysis imply that various country characteristics engender disparities in the responses to monetary policy shocks. The magnitude of the output responses to monetary policy shocks is larger in countries with a monetary policy framework closer to inflation-targeting, a more flexible exchange rate regime, more rapid population aging, and a more rigid labor market, and is smaller in countries with a more independent central bank and a more developed financial market. The size of the price responses is larger in countries with higher trade openness and a more rigid labor market, and smaller in countries with a monetary policy framework closer to inflation-targeting and more rapid population aging.

Suggested Citation

  • Yim, Geunhyung & Nah, Seungho & Oh, Daun, 2024. "Cross-country differences in the effects of monetary policy shocks on output and prices and their determinants," Japan and the World Economy, Elsevier, vol. 70(C).
  • Handle: RePEc:eee:japwor:v:70:y:2024:i:c:s0922142524000185
    DOI: 10.1016/j.japwor.2024.101255
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    References listed on IDEAS

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    1. Chinn, Menzie D. & Ito, Hiro, 2006. "What matters for financial development? Capital controls, institutions, and interactions," Journal of Development Economics, Elsevier, vol. 81(1), pages 163-192, October.
    2. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
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    More about this item

    Keywords

    Monetary Policy Shock; Industrial Production Index; Consumer Price Index; Sign-restricted SVAR; Second-stage Regression;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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