The Interplay between Financial Conditions and Monetary Policy Shocks

51 Pages Posted: 25 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: 2016-10-17

Abstract

We study the interplay between monetary policy and financial conditions shocks. Such shocks have a significant and similar impact on the real economy, though with different degrees of persistence. The systematic fed funds rate response to a financial shock contributes to bringing the economy back towards trend, but a zero lower bound on policy rates can prevent this from happening, with a significant cost in terms of output and investment. In a retrospective analysis of the U.S. economy over the past 20 years, 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, zero lower bound

JEL Classification: E44, E52, G28

Suggested Citation

Bassetto, Marco and Benzoni, Luca and Serrao, Trevor, The Interplay between Financial Conditions and Monetary Policy Shocks (2016-10-17). FRB of Chicago Working Paper No. WP-2016-11. Available at SSRN: https://ssrn.com/abstract=2857534

Marco Bassetto (Contact Author)

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

Luca Benzoni

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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