The Interplay Between Financial Conditions and Monetary Policy Shocks

Marco Bassetto, Luca Benzoni and Trevor Serrao

No WP-2016-11, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: We study the interplay between monetary policy and financial conditions shocks. Such shocks have a significant and similar impact on the real economy, though with different degrees of persistence. The systematic fed funds rate response to a financial shock contributes to bringing the economy back towards trend, but a zero lower bound on policy rates can prevent this from happening, with a significant cost in terms of output and investment. In a retrospective analysis of the U.S. economy over the past 20 years, we decompose the realization of economic variables into the contributions of financial, monetary policy, and other shocks.

Keywords: Excess bond premium; financial conditions; monetary policy; zero lower bound (search for similar items in EconPapers)
JEL-codes: E44 E52 G28 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2016-10-17
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (6)

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Working Paper: The Interplay Between Financial Conditions and Monetary Policy Shocks (2017)
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