Decomposing the monetary policy multiplier

Piergiorgio Alessandri (), Fabrizio Venditti () and Oscar Jordà ()
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Piergiorgio Alessandri: Bank of Italy
Fabrizio Venditti: Bank of Italy
Oscar JordÃ: Federal Reserve Bank of San Francisco and University of California, Davis

No 1422, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We show that financial markets play an important role in rendering the transmission of monetary policy shocks asymmetric in the US. Credit spreads only adjust to unexpected increases in interest rates, causing output and prices to respond more to a tightening than an expansion. The ‘financial multiplier’ of monetary policy – defined as the ratio between the cumulative responses of employment and credit spreads at the one-year horizon – is small and subject to significant estimation uncertainty for a monetary expansion, it is about -2 for a monetary tightening, and it reaches -4 for a monetary tightening that take place under tense credit market conditions.

Keywords: monetary policy; credit spreads; local projections; Kitagawa decomposition (search for similar items in EconPapers)
JEL-codes: C13 C32 E32 E52 (search for similar items in EconPapers)
Date: 2023-10
New Economics Papers: this item is included in nep-mon
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