Monetary Policy, Credit Spreads, and Business Cycle Fluctuations

Edward Herbst and Dario Caldara

No 899, 2015 Meeting Papers from Society for Economic Dynamics

Abstract: This paper provides new evidence on the transmission of monetary policy shocks to the real economy and to credit markets. The identification of monetary policy shock is based on a high-frequency event study analysis. Two key results emerge from the analysis for the Great Moderation period. First, monetary policy shocks were a key driver of business and credit market conditions, explaining 35% of the forecast error of industrial production and 50% of the excess bond premium. Second, monetary policy shocks explain all movement in the excess bond premium correlated with real activity leaving no role for exogenous disruptions in credit intermediation. Finally, we extend our analysis to include the Great Recession and to examine the role of unconventional monetary policy.

Date: 2015
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed015:899

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