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The changing transmission mechanism of US monetary policy

Author

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  • Norhana Endut

    (Bank Negara Malaysia)

  • James Morley

    (University of New South Wales)

  • Pao-Lin Tien

    (Bureau of Economic Analysis)

Abstract

We examine the relative importance of the interest rate, exchange rate, and bank-lending channels for the transmission mechanism of monetary policy in the United States over the past fifty years. Our analysis is based on a structural vector autoregressive model that includes bank loans and uses sign restrictions to identify monetary policy shocks. Given these identified policy shocks, we quantify the relative importance of different transmission channels via counterfactual analysis. Our results suggest a nontrivial role for the bank-lending channel at the aggregate level, but its importance has been greatly diminished since the early 1980s. Despite the timing, we find no support for a link between this change in the transmission mechanism and the concurrent reduction in output volatility associated with the Great Moderation. There is, however, some evidence of a link to the reduction in inflation volatility occurring at the same time.

Suggested Citation

  • Norhana Endut & James Morley & Pao-Lin Tien, 2018. "The changing transmission mechanism of US monetary policy," Empirical Economics, Springer, vol. 54(3), pages 959-987, May.
    • Handle: RePEc:spr:empeco:v:54:y:2018:i:3:d:10.1007_s00181-017-1240-7
    DOI: 10.1007/s00181-017-1240-7
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    2. Nicolas Moumni & Benaissa Nahhal, 2014. "Impact of Liquidity Level on the Monetary Policy Transmission Effectiveness of the Moroccan Central Bank (Bank Al Maghrib)," International Journal of Economics and Financial Issues, Econjournals, vol. 4(4), pages 801-818.
    3. Afsin Sahin, 2019. "Loom of Symmetric Pass-Through," Economies, MDPI, vol. 7(1), pages 1-25, February.
    4. Li, Huan & Ni, Jinlan & Xu, Yueli & Zhan, Minghua, 2021. "Monetary policy and its transmission channels: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    5. Fatih OKUR & Ömer AKKUŞ & Atakan DURMAZ, 2019. "The effectiveness of the monetary transmission mechanism channel in Turkey," Eastern Journal of European Studies, Centre for European Studies, Alexandru Ioan Cuza University, vol. 10, pages 161-180, June.
    6. Lombardi, Domenico & Siklos, Pierre L. & Xie, Xiangyou, 2018. "Monetary policy transmission in systemically important economies and China’s impact," Journal of Asian Economics, Elsevier, vol. 59(C), pages 61-79.
    7. Borrallo Egea, Fructuoso & Hierro, Luis Ángel, 2019. "Transmission of monetary policy in the US and EU in times of expansion and crisis," Journal of Policy Modeling, Elsevier, vol. 41(4), pages 763-783.
    8. Evans, Olaniyi, 2021. "The Curious Case of Petro-Monetary Transmission Mechanism in Oil-Producing Countries: An Analysis of the Effect of Oil Price on Inflation in Nigeria," MPRA Paper 118198, University Library of Munich, Germany.
    9. Luigi Oddo & Mile Bosnjak, 2021. "A comparative analysis of the monetary policy transmission channels in the U.S: a wavelet-based approach," Applied Economics, Taylor & Francis Journals, vol. 53(38), pages 4448-4463, August.

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    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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