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Monetary Policy Surprises, Credit Costs and Economic Activity

Mark Gertler () and Peter Karadi ()

No 9824, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We provide evidence on the nature of the monetary policy transmission mechanism. To identify policy shocks in a setting with both economic and financial variables, we combine traditional monetary vector autoregression (VAR) analysis with high frequency identification (HFI) of monetary policy shocks. We first show that the shocks identified using HFI surprises as external instruments produce responses in output and inflation consistent with those obtained in the standard monetary VAR analysis. We also find, however, that monetary policy responses typically produce “modest” movements in short rates that lead to “large” movements in credit costs and economic activity. The large movements in credit costs are mainly due to the reaction of both term premia and credit spreads that are typically absent from the baseline model of monetary transmission. Finally, we show that forward guidance is important to the overall strength of policy transmission.

Keywords: Credit Spread; External Instrument; Forward Guidance; High-Frequency Identification; Monetary Policy Transmission; Structural VAR; Term Premium (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2014-02
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Related works:
Journal Article: Monetary Policy Surprises, Credit Costs, and Economic Activity (2015) Downloads
Working Paper: Monetary Policy Surprises, Credit Costs, and Economic Activity (2015) Downloads
Working Paper: Monetary Policy Surprises, Credit Costs and Economic Activity (2014) Downloads
Chapter: Monetary Policy Surprises, Credit Costs and Economic Activity (2013)
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