Delayed Monetary Policy Effects in a Multi-Regime Cointegrated VAR(MRCIVAR)

Pu Chen, Willi Semmler and Helmut Maurer

Econometrics and Statistics, 2025, vol. 33, issue C, 105-134

Abstract: The effectiveness of monetary policies under delayed policy impacts are explored. Initially, in the context of a differential delay system, the macro-finance link is investigated. The nonlinear macro system with delays gives rise to a time-delayed optimal control problem. The optimality conditions are then analyzed, and the control problem is numerically solved by discretization and optimization methods. These solutions suggest that with too much delay, destabilizing financial conditions may emerge, rendering the policy ineffective. Then the possibility of asymmetric adjustments to a long-run steady-state, in a non-stationary environment is explored using a multi-regime cointegrated VAR (MRCIVAR) model for both an interest rate cut, and a non-interest rate cut regime. Though the rate cuts may not perform well with too long of a delay, given diverse shocks, monetary policy still performs better in a rate cut regime. Given the perils of deteriorating financial conditions, the better stabilization properties in a rate cut regime are empirically validated through data for European countries and the US.

Keywords: Inflation targeting; Differential delay system; The regime-switching linear-quadratic model (RSLQ); Financial conditions; Unconventional monetary policy; Delayed policy effects; Multi-regime cointegrated VAR (MRCIVAR) (search for similar items in EconPapers)
JEL-codes: E42 E52 E58 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosta:v:33:y:2025:i:c:p:105-134

DOI: 10.1016/j.ecosta.2022.03.004

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