Monetary policy and balance sheets

Deniz Igan, Alain Kabundi (), Francisco Nadal De Simone and Natalia Tamirisa ()

Journal of Policy Modeling, 2017, vol. 39, issue 1, 169-184

Abstract: This paper examines the transmission of monetary policy shocks through private sector balance sheets in the United States over the past three decades. Using a Factor-Augmented Vector Autoregression (FAVAR) model on an expanded dataset, including sectoral balance sheet variables, we show that the balance sheets of various economic agents act as important links in the monetary policy transmission mechanism and affect the impulse response of inflation, output, and unemployment. Balance sheets of financial intermediaries, such as commercial banks, asset-backed-security issuers and, to a lesser extent, security brokers and dealers, shrink in response to monetary tightening, while money market fund assets grow. However, their economic significance in the run-up to the recent financial crisis was small. Furthermore, judging from the magnitude of the interest rate elasticity of house price changes, it seems that large increases in interest rates would have been needed to avert a rapid rise of house prices and an unsustainable increase in leverage. This suggests that financial stability concerns may require some role for other policies such as macroprudential policy.

Keywords: Monetary policy transmission; Balance sheets; FAVAR; Generalized dynamic factor models (search for similar items in EconPapers)
JEL-codes: E44 E52 G20 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (12)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0161893816300849
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Monetary Policy and Balance Sheets (2013)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jpolmo:v:39:y:2017:i:1:p:169-184

DOI: 10.1016/j.jpolmod.2016.09.003

Access Statistics for this article

Journal of Policy Modeling is currently edited by A. M. Costa

More articles in Journal of Policy Modeling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().