Decomposing the monetary policy multiplier

Piergiorgio Alessandri, Òscar Jordà and Fabrizio Venditti

Journal of Monetary Economics, 2025, vol. 152, issue C

Abstract: Financial markets play an important role in generating monetary policy transmission asymmetries in the U.S. Credit spreads only adjust to unexpected increases in interest rates, causing output and prices to respond more to a monetary contraction than to a monetary loosening. At a one year horizon, the ‘financial multiplier’ of monetary policy — defined as the ratio between the cumulative responses of employment and credit spreads — is zero for a monetary loosening, -2 for a monetary contraction, and -4 for a monetary contraction that takes place under strained credit market conditions. These results have important policy implications: monetary policy may become inadvertently tight in times of financial distress.

Keywords: Monetary policy; Credit spreads; Local projections; Kitagawa decomposition (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:152:y:2025:i:c:s0304393225000546

DOI: 10.1016/j.jmoneco.2025.103783

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