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A model of state-dependent monetary policy

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  • Bernstein, Joshua

Abstract

In the presence of occasionally binding borrowing constraints, the responses of output to monetary policy shocks depend on the Euler equation of unconstrained households. Conversely, the set of unconstrained households depends on the responses of output. I show analytically that this equilibrium interaction creates state-dependent and asymmetric output responses. When stockholders’ incomes are more pro-cyclical than non-stockholders’, output responds less to monetary policy in recessions, and contractionary monetary policy is more powerful than expansionary policy. These results are consistent with the empirical evidence.

Suggested Citation

  • Bernstein, Joshua, 2021. "A model of state-dependent monetary policy," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 904-917.
    • Handle: RePEc:eee:moneco:v:117:y:2021:i:c:p:904-917
    DOI: 10.1016/j.jmoneco.2020.07.001
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    Cited by:

    1. Hummaira Jabeen, 2022. "Monetary Policy Shock Transmission in Emerging Markets," Journal of Policy Research (JPR), Research Foundation for Humanity (RFH), vol. 8(4), pages 379-390, December.
    2. Mitchener, Kris James & Pina, Gonçalo, 2023. "The effects of countercyclical interest rates: Evidence from the classical gold standard," Journal of International Economics, Elsevier, vol. 145(C).
    3. Yuichiro Waki, "undated". "Excess sensitivity to targeted fiscal interventions in HANK models with zero liquidity," MRG Discussion Paper Series 4823, School of Economics, University of Queensland, Australia.
    4. Kamalyan, Hayk, 2021. "Phase-Dependent Monetary and Fiscal Policy," MPRA Paper 110341, University Library of Munich, Germany.
    5. Mishel Ghassibe, 2024. "Endogenous Production Networks and Non-Linear Monetary Transmission," Working Papers 1449, Barcelona School of Economics.

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    More about this item

    Keywords

    Monetary policy; Household heterogeneity; Borrowing constraints; State-dependence; Asymmetry;
    All these keywords.

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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