Monetary Policy Gradualism and the Nonlinear Effects of Monetary Shocks

50 Pages Posted: 28 May 2020

Date Written: April 27, 2020

Abstract

Monetary policy in the United States has often followed a gradual approach by changing policy rates through multiple small adjustments rather than all-at-once hikes or cuts. This conduct could provide a signal about the extent of the intended policy change. We quantify the state-dependent effects of monetary shocks in times of more and less gradual policy. We propose two indicators of high vs. low gradualism periods and use local projections to estimate the effects of identified high-frequency shocks in the two states. Our findings suggest that monetary policy transmission is stronger when the perception of gradualism is high.

Keywords: gradualism, inertia, monetary policy transmission, state dependence, local projections

JEL Classification: C22, C26, E44, E52, E58

Suggested Citation

Metelli, Luca and Natoli, Filippo and Rossi, Luca, Monetary Policy Gradualism and the Nonlinear Effects of Monetary Shocks (April 27, 2020). Bank of Italy Temi di Discussione (Working Paper) No. 1275, Available at SSRN: https://ssrn.com/abstract=3612969 or http://dx.doi.org/10.2139/ssrn.3612969

Luca Metelli (Contact Author)

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Filippo Natoli

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

Luca Rossi

Bank of Italy ( email )

Via Nazionale 91
Rome, 00184
Italy

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