State dependence of monetary policy across business, credit and interest rate cycles

Sami Alpanda (), Eleonora Granziera and Sarah Zubairy

European Economic Review, 2021, vol. 140, issue C

Abstract: We study how phases of the business, credit and interest rate cycles affect the transmission of monetary policy using state-dependent local projection methods and data from 18 advanced economies. We find that the impact of monetary policy shocks on output and other macroeconomic and financial variables is weaker during periods of economic downturns, low household debt, and high interest rates. The business cycle state dependence tends to dominate the other documented state dependencies. We build a small-scale theoretical model to rationalize these facts. The model points to the presence of collateral and debt-service constraints on household borrowing and refinancing as potential drivers of state dependence of monetary policy with respect to the business, credit, and interest rate cycles. Our findings bear significant implications for the transmission of monetary policy, and highlight potentially important features to be considered in models used to inform monetary policy decisions.

Keywords: Monetary policy; Household debt; Local projections; State dependence (search for similar items in EconPapers)
JEL-codes: E21 E32 E52 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

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Related works:
Working Paper: State dependence of monetary policy across business, credit and interest rate cycles (2019)
Working Paper: State dependence of monetary policy across business, credit and interest rate cycles (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:140:y:2021:i:c:s001429212100235x

DOI: 10.1016/j.euroecorev.2021.103936

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