The Changing Transmission Mechanism of U.S. Monetary Policy

Norhana Endut, James Morley, Pao-Lin Tien
2016 Social Science Research Network  
We examine the relative importance of the interest rate, exchange rate, and banklending channels for the transmission mechanism of monetary policy in the United States over the past 50 years. Our analysis is based on a structural vector autoregressive model that includes bank loans and uses sign restrictions to identify monetary policy shocks. Given these identified policy shocks, we quantify the relative importance of different transmission channels via counterfactual analysis. Our results
more » ... is. Our results suggest a nontrivial role for the bank-lending channel, but its importance has been greatly diminished since the early 1980s. Despite the timing, we find no support for a link between this change in the transmission mechanism and the concurrent reduction in output volatility associated with the Great Moderation. There is, however, some evidence of a link to the reduction in inflation volatility at the time.
doi:10.2139/ssrn.2823666 fatcat:fnwerepci5d5famzcixejbwyfy