What makes Monetary Policy More Powerful? A Big Data Approach

Dilan Aydin Yakut, David Byrne and Robert Goodhead
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Dilan Aydin Yakut: Central Bank of Ireland
David Byrne: Central Bank of Ireland
Robert Goodhead: Central Bank of Ireland

No 09/RT/26, Research Technical Papers from Central Bank of Ireland

Abstract: A large literature on monetary policy transmission has emphasised many potential non-linear drivers. Transmission strength has been shown to vary with the business cycle, financial frictions, and uncertainty, amongst other mechanisms. However, most studies focus on a small number of channels at a time. Our study takes a “big data†approach to non-linearity, allowing us to rank the relative importance of a wide range of non-linear transmission channels. We focus on asset price responses to central bank statements. Using a large, mixed-frequency macro-financial dataset, we show that US monetary policy surprises feature a small number of important non-linear drivers, relating especially to financial variables. Monetary transmission to long-term interest rates is weaker at times of high interest rates and high credit growth, consistent with diminishing effectiveness over a hiking cycle. While non-linearity over the interest rate cycle appears to dominate other channels, we find some evidence that monetary policy is weaker in booms. Using euro area data, we find a prominent role for sovereign risk in state-dependent transmission.

Keywords: Monetary policy; state-dependence; non-linearity; event study; big data. (search for similar items in EconPapers)
JEL-codes: C11 C32 E52 (search for similar items in EconPapers)
Date: 2026-08
New Economics Papers: this item is included in nep-mon
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