The Nonlinear Interaction Between Monetary Policy and Financial Stress
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Summary:
This paper analyzes the nonlinear relationship between monetary policy and financial stress and its effects on the transmission of shocks to output. Results from a Bayesian Threshold Vector Autoregression (TVAR) model show that the effects of monetary policy shocks on output growth are stronger during normal times than during times of financial stress. Monetary policy shocks are effective to ease stressed financial conditions, but have limited ability to fully contain the buildup of vulnerabilities. These results have important policy implications for central banks’ countercyclical policies under different financial conditions and for “lean against the wind” policies to address financial vulnerabilities.
Series:
Working Paper No. 2017/184
Subject:
Banking Economic sectors Financial sector Financial sector policy and analysis Financial sector stability Financial services Monetary policy Monetary tightening Production Production growth Yield curve
English
Publication Date:
August 4, 2017
ISBN/ISSN:
9781484313794/1018-5941
Stock No:
WPIEA2017184
Pages:
34
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