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Does the Transmission of Monetary Policy Shocks Change when Inflation is High?

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  • Canova, Fabio
  • Perez Forero, Fernando

Abstract

We investigate the transmission of US monetary policy shocks in high and low inflation regimes using a Bayesian threshold vector autoregressive model. The propagation of conventional disturbances differ: the peak response of output growth and of inflation is smaller but the effects lasts longer when inflation is high. Liquidity shocks are more expansionary when inflation is high. The reaction of financial markets to the shocks account for the differences. Implications for theoretical models of monetary policy transmission are discussed.

Suggested Citation

  • Canova, Fabio & Perez Forero, Fernando, 2024. "Does the Transmission of Monetary Policy Shocks Change when Inflation is High?," CEPR Discussion Papers 18993, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:18993
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    Keywords

    Monetary policy shocks; Bayesian methods;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • 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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