Monetary Policy during Financial Crises: Is the Transmission Mechanism Impaired?

Nils Jannsen, Galina Potjagailo and Maik Wolters

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: We study the effects of monetary policy on output during financial crises. We use a large panel of advanced and emerging economies to guarantee a sufficiently high number of financial crises episodes. A financial crises dummy, which is constructed based on the narrative approach, is interacted with other key macroeconomic variables in a panel VAR. Theory suggests that monetary policy might be more effective in financial crises if it can ease malfunctioning of financial markets for example by loosening credit constraints or restoring confidence. Alternatively, deleveraging and uncertainty might predominate and make the economy less interest rate responsive and monetary policy less effective in financial crises. Taking a sample from the mid 1980s to today we find that an expansionary monetary policy shock is very effective in raising GDP during the recessionary period of a financial crisis. The effect is stronger than in non-crises times. In contrast, during the recovery period of a financial crisis, monetary policy has a very small effect on GDP. These differences can be explained by a confidence channel. During the joint occurrence of a recession and a financial crisis an expansionary monetary policy shock increases consumer confidence and GDP. During the following recovery monetary policy has no effects on confidence or GDP. Other variables like credit, housing prices and exchange rates can at most partially explain differences in transmission between the different regimes.

JEL-codes: E52 E58 G01 (search for similar items in EconPapers)
Date: 2015
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-mac and nep-mon
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Citations: View citations in EconPapers (35)

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Related works:
Journal Article: Monetary Policy during Financial Crises: Is the Transmission Mechanism Impaired? (2019)
Working Paper: Monetary policy during financial crises: Is the transmission mechanism impaired? (2015)
Working Paper: Monetary policy during financial crises: Is the transmission mechanism impaired? (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:113096

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