Rethinking productivity shocks: The role of monetary policy constraints

Naafey Sardar

Macroeconomic Dynamics, 2026, vol. 30, -

Abstract: I evaluate differences in the response of the U.S. economy to productivity shocks around the effective lower bound (ELB) using post-WWII data. My empirical results indicate that positive productivity shocks are more expansionary when monetary policy operates away from the ELB, in line with a basic New Keynesian model, compared to the ELB regime. The interest-sensitive component of GDP, i.e., private investment, is the main driver of this nonlinear response. I find evidence of regime thresholds beyond the standard 0.25% Federal Funds Rate definition of the ELB that could influence the state-dependent shock response of the economy. My work highlights the role played by the monetary policy channel in changing the propagation of productivity shocks to the U.S. economy.

Date: 2026
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