The Nonlinear Interaction Between Monetary Policy and Financial Stress

Author/Editor:

Martín Saldías

Publication Date:

August 4, 2017

Electronic Access:

Free Download. Use the free Adobe Acrobat Reader to view this PDF file

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

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:

English

Publication Date:

August 4, 2017

ISBN/ISSN:

9781484313794/1018-5941

Stock No:

WPIEA2017184

Pages:

34

Please address any questions about this title to publications@imf.org