Financial conditions and monetary policy in the US

Selahattin Dibooglu, Seyfettin Erdogan, Durmus Cagri Yildirim and Emrah Çevik

Economic Systems, 2020, vol. 44, issue 4

Abstract: We examine the FED’s monetary policy rule with financial stability considerations and under asymmetry. We use the National Financial Conditions Index constructed by the Chicago FED in order to test whether financial stability concerns enter monetary policy formulations in the US. We model nonlinearity in monetary policy by a Markov regime-switching model. The results show that the monetary policy implemented by the FED can be characterized as a two-state Markov process and financial instability significantly increases the likelihood of regime-switching from a “tranquil” to a “distressed” regime. Moreover, the likelihood of a switch in the FED’s monetary policy regime between tranquil and distressed seems to increase when a certain threshold level of the financial conditions index is reached. Finally, our results seem to be robust to alternative specifications of the reaction function and different forms of non-linearity.

Keywords: Monetary policy; Central banking; Taylor rules; Markov regime switching (search for similar items in EconPapers)
JEL-codes: C22 E52 E58 E61 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecosys:v:44:y:2020:i:4:s0939362518303947

DOI: 10.1016/j.ecosys.2020.100819

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