Time variation in U.S. monetary policy and credit spreads

Yu-Fan Huang

Journal of Macroeconomics, 2015, vol. 43, issue C, 205-215

Abstract: Through the lens of the Taylor rule, this paper is concerned with the circumstances in which the Fed would change its behavior. A Bayesian MCMC method is proposed to deal with a switching Taylor rule robust to zero lower bound and heteroscedasticity. The posterior results from Markov-switching Taylor rule indicate that, first, there is strong evidence for an “active” regime in which the Fed responses to output gap aggressively. Second, the movements in the posterior probability of the active regime is highly correlated with credit spreads. I then use a switching Taylor rule with transition probabilities connected to credit spreads to show that the positive correlation is strongly supported by data, implying that the Fed responses to output gap more strongly when the credit spreads rise.

Keywords: Switching Taylor Rule; MCMC; Zero lower bound; Credit spreads (search for similar items in EconPapers)
JEL-codes: C11 E52 E58 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:43:y:2015:i:c:p:205-215

DOI: 10.1016/j.jmacro.2014.11.005

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