Pushing on a String: US Monetary Policy is Less Powerful in Recessions

42 Pages Posted: 27 Aug 2015

See all articles by Silvana Tenreyro

Silvana Tenreyro

London School of Economics (LSE)

Gregory Thwaites

Bank of England - Monetary Analysis

Date Written: August 2015

Abstract

We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.

Keywords: assymetric effects of monetary policy, monetary policy

JEL Classification: E1, E31, E32, E52, E58

Suggested Citation

Tenreyro, Silvana and Thwaites, Gregory, Pushing on a String: US Monetary Policy is Less Powerful in Recessions (August 2015). CEPR Discussion Paper No. DP10786, Available at SSRN: https://ssrn.com/abstract=2652156

Silvana Tenreyro (Contact Author)

London School of Economics (LSE) ( email )

Houghton Street
London WC2A 2AE
United Kingdom

Gregory Thwaites

Bank of England - Monetary Analysis ( email )

Threadneedle Street
London EC2R 8AH
United Kingdom

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