Are the effects of monetary policy shocks in the US different during financial crises?
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In this seminar, Jasmine Zheng will provide an overview of her paper: Are the effects of monetary policy shocks in the US different during financial crises? The focus of the paper is on analysing the impact and effectiveness of conventional monetary policy during periods of low and high financial stress in the US economy. In the theoretical literature, the nonlinearity in monetary policy is closely linked to the financial accelerator mechanism. This hypothesized nonlinearity in monetary policy refers to the large increase in the cost of credit for borrowers with low net worth during financial crises associated with the implementation of contractionary monetary policy, leading to a large decline in output. Using quarterly data from 1973Q1 to 2008Q4, and further extended to 2012Q4, the impact of conventional monetary policy during financial crises is analysed by employing a Threshold Vector Autoregression model to capture switching between the low and high financial stress regimes implied by the theoretical literature.
Jasmine concludes that the empirical findings support regime-dependent effects of conventional monetary policy in the US Expansionary monetary policy can be potent and effective during financial crises. However, the existence of a dominant cost channel effect during periods of high financial stress suggest that policymakers will have to take into careful consideration of the short run output-inflation trade off when implementing expansionary monetary policies during financial crises.
Jamine Zheng is a final year PhD candidate at the Centre of Applied Macroeconomic Analysis in The Australian National University. Jamine worked as an Energy Analyst in April 2009, and as a government economist, co-starring as the editor of the Economic Survey of Singapore in January 2010.
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