The Changing Transmission Mechanism of U.S. Monetary Policy
41 Pages Posted: 10 Feb 2015
Date Written: January 1, 2015
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 50 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.
Keywords: Bank-Lending Channel, Sign Restrictions, Great Moderation
JEL Classification: C32, E52
Suggested Citation: Suggested Citation