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Monetary transmission in money markets: The not-so-elusive missing piece of the puzzle

Zhengyang Chen and Victor (Vic) Valcarcel

Journal of Economic Dynamics and Control, 2021, vol. 131, issue C

Abstract: We investigate the effects of U.S. monetary policy shocks from alternative policy indicators for a modern sample encompassing 1988–2020. The choice of the Wu and Xia (2016) shadow federal funds rate leads to persistent price puzzles. These puzzles arise despite inclusion of the usual suspect fixes such as commodity prices, federal funds futures and forward rate data. We find they occur at monthly and quarterly frequencies. We consider alternative indicators with the same broad monetary aggregates Keating et al. (2019) employed in their investigation of a historical sample. They provide a consistent resolution of the price puzzle and they do not require the ad hoc inclusion of commodity prices or futures data. This price puzzle correction is not a feature of our time-varying approach as it also obtains from constant parameter econometric estimation. Our analysis suggests monetary policy has transmitted substantial expansionary effects in money markets in the aftermath of the 2007 Financial Crisis and the decade that followed.

Keywords: Price puzzle; Divisia money; Interest rate pass-through; Time-varying-parameter vector autoregressions (TVP-VAR); Time-varying-parameter factor-augmented vector autoregressions (TVP-FAVAR); Unexpected monetary policy shocks (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:131:y:2021:i:c:s0165188921001494

DOI: 10.1016/j.jedc.2021.104214

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Journal of Economic Dynamics and Control is currently edited by J. Bullard, C. Chiarella, H. Dawid, C. H. Hommes, P. Klein and C. Otrok

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