Credit Growth, Monetary Policy, and Economic Activity in a Three-Regime TVAR Model

Stefan Avdjiev and Zheng Zeng

No 449, BIS Working Papers from Bank for International Settlements

Abstract: We employ a threshold vector autoregression (TVAR) methodology in order to examine the nonlinear nature of the interactions among credit market conditions, monetary policy, and economic activity. We depart from the existing literature on the subject along two dimensions. First, we focus on a model in which the relevant threshold variable describes the state of economic activity rather than credit market conditions. Second, in contrast to the existing TVAR literature, which concentrates exclusively on single-threshold models, we allow for the presence of a second threshold, which is overwhelmingly supported by all relevant statistical tests. Our results indicate that the dynamics of the interactions among credit market conditions, monetary policy and economic activity change considerably as the economy moves from one phase of the business cycle to another and that single-threshold TVAR models are too restrictive to fully capture the nonlinear nature of those interactions. The impact of most shocks tends to be largest during periods of sub-par economic growth and smallest during times of moderate economic activity. By contrast, credit risk shocks have the largest impact when output growth is considerably above it long-term trend.

Keywords: Threshold vector autoregression; regime switching; nonlinearity; business-cycle asymmetry; credit shock (search for similar items in EconPapers)
Pages: 41 pages
Date: 2014-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (19)

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Journal Article: Credit growth, monetary policy and economic activity in a three-regime TVAR model (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:449

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