More Potent Monetary Policy? Insights from a Threshold Model

Jarkko Jääskelä
Additional contact information
Jarkko Jääskelä: Reserve Bank of Australia

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: It has been argued that the effect of a change in the monetary policy interest rate on aggregate demand may be larger at higher levels of indebtedness through its impact on cash flows. However, the extent of credit constraints may be at least as important, if not more so. In particular, monetary policy could have a larger impact on aggregate demand when credit constraints are pervasive (which could be the case at low or high levels of indebtedness, or both). This paper examines the extent to which the strength of credit growth, which can be seen as a proxy for credit constraints, may affect the transmission of monetary policy in a way that cannot be captured in linear models. The results reveal that GDP growth is more responsive to interest rate shocks when credit growth is low. Separate models for household and business credit growth confirm this finding: consumption and business investment are more responsive to interest rate shocks when credit is growing slowly for the household and business sectors, respectively.

Keywords: monetary policy; business-cycle asymmetries; threshold models (search for similar items in EconPapers)
JEL-codes: C51 C52 E37 E52 (search for similar items in EconPapers)
Date: 2007-07
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.rba.gov.au/publications/rdp/2007/pdf/rdp2007-07.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:rba:rbardp:rdp2007-07

Access Statistics for this paper

More papers in RBA Research Discussion Papers from Reserve Bank of Australia Contact information at EDIRC.
Bibliographic data for series maintained by Paula Drew ().