The Interplay between Financial Conditions and Monetary Policy Shocks

37 Pages Posted: 17 Oct 2016

See all articles by Marco Bassetto

Marco Bassetto

Federal Reserve Bank of Chicago

Luca Benzoni

Federal Reserve Bank of Chicago - Research Department

Trevor Serrao

Federal Reserve Bank of Chicago

Multiple version iconThere are 2 versions of this paper

Date Written: October 14, 2016

Abstract

We conduct an empirical study of the interplay between monetary policy and financial conditions shocks. We find that such shocks have a significant and similar impact on the real economy, though with different degrees of persistence, and the systematic fed funds rate response to a financial shock contributes to bringing the economy back towards its trend. However, a binding zero lower bound on policy rates can prevent policymakers from leaning against the wind, with a significant cost in terms of output and investment. We illustrate these conclusions in a retrospective analysis of the U.S. economy over the past 20 years, in which we decompose the realization of economic variables into the contributions of financial, monetary policy, and other shocks.

Keywords: excess bond premium, financial conditions, monetary policy shocks, zero lower bound

JEL Classification: E32, E44, G17

Suggested Citation

Bassetto, Marco and Benzoni, Luca and Serrao, Trevor, The Interplay between Financial Conditions and Monetary Policy Shocks (October 14, 2016). Available at SSRN: https://ssrn.com/abstract=2852483 or http://dx.doi.org/10.2139/ssrn.2852483

Marco Bassetto

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Luca Benzoni (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604
United States
312-322-8499 (Phone)

HOME PAGE: http://lbenzoni.frbchi.googlepages.com/

Trevor Serrao

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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