Has the Transmission of US Monetary Policy Changed Since 2022?
IMF Working Papers, June 21, 2024
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- Has the Transmission of US Monetary Policy Changed Since 2022?
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Bibliographic details
- Authors: Philip Barrett, Josef Platzer
- Published: June 21, 2024
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9798400281051.001
Research question and approach
- Question: Did the transmission of US monetary policy change since 2022, or did other shocks offset tighter policy?
- Data and method:
- Use pre-pandemic data to estimate a VAR with monetary policy shocks identified from high-frequency data.
- Use the estimated VAR as a filter to back out the sequence of monetary policy shocks consistent with data since 2022.
- Compare the implied shocks to the actual shocks.
Key empirical findings
- Activity and inflation responded slowly to the Federal Reserve’s rate hikes in 2022.
- The difference between implied and actual shocks is statistically significant during February-July 2022.
- These differences imply monetary transmission was around 25 percent weaker than normal.
- Allowing other shocks to change to match the post-COVID covariance of the data produces similar results but in a shorter period.
- Decomposition of uncertainty in the estimate finds that colinearity of shocks is generally more important than uncertainty over model parameters.
- Extension to central bank information shocks finds Federal Reserve communication was less powerful than usual during 2021.
Subject areas and keywords
- Subject: COVID-19; Data processing; Econometric analysis; Economic and financial statistics; Health; Inflation; Labor; Labor markets; Prices; Vector autoregression
- Keywords: COVID-19; Data processing; Federal Reserve communication; Filtering; Global; Inflation; Labor markets; Monetary Policy; monetary policy shock; pandemic data; rate hike; Semi-structural Identification; transmission of monetary policy; VAR; Vector autoregression
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- Working Paper