State dependence of monetary policy across business, credit and interest rate cycles

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Title: State dependence of monetary policy across business, credit and interest rate cycles
ISBN: 978-952-323-290-7
Author: Alpanda, Sami ; Granziera, Eleonora ; Zubairy, Sarah
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2019
Series number: 16/2019
Year of publication: 2019
Publication date: 6.9.2019
Pages: 56
Subject (yso): rahapolitiikka; suhdannevaihtelut; kotitaloudet (organisaatiot); velat; luotot
Keywords: syklit; korot
JEL: E21; E32; E52
Other keywords: Monetary Policy; Household Debt; Local Projections
Abstract: We investigate how the business, credit and interest rate cycles affect the monetary transmission mechanism, using state-dependent local projection methods and data from 18 advanced economies. We exploit the time-series variation within countries, as well as cross-sectional variation across countries, to investigate this issue. We find that the impact of monetary policy shocks on output and most other macroeconomic and financial variables is smaller during periods of economic downturns, high household debt, and high interest rates. We then build a small-scale theoretical model to rationalize these facts. The model highlights the presence of collateral and debt-service constraints on household borrowing and refinancing as a potential cause for state dependence in monetary policy with respect to the business, credit, and interest rate cycles.

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