Effects of US monetary policy shocks during financial crises - A threshold vector autoregression approach

Vol: 
25/2016
Author name: 
Fry-McKibbin R
Zheng J
Year: 
2016
Month: 
May
Abstract: 

This paper analyzes the impact of monetary policy during periods of low and high financial stress in the US economy using a Threshold Vector Autoregression model. There is evidence that expansionary monetary policy is effective during periods of high financial stress with larger responses having a higher proportionate effect on output. The existence of a cost channel effect during periods of high financial stress implies the existence of a short run output-inflation trade off during financial crises. Large expansionary monetary shocks also increase the likelihood of moving the economy out of a high financial stress regime.

Publication file: 

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