Norges Bank

Working Paper

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

Author:
Sami Alpanda, Eleonora Granziera and Sarah Zubairy
Series:
Working Paper
Number:
21/2019

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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ISSN 1502-8190 (online)

Published 14 November 2019 15:40
Published 14 November 2019 15:40