The Interplay Between Financial Conditions and Monetary Policy Shocks
Abstract: We study the interplay between monetary policy and financial conditions shocks. Such shocks have a significant and similar impact on the real economy, though with different degrees of persistence. The systematic fed funds rate response to a financial shock contributes to bringing the economy back towards trend, but a zero lower bound on policy rates can prevent this from happening, with a significant cost in terms of output and investment. In a retrospective analysis of the U.S. economy over the past 20 years, we decompose the realization of economic variables into the contributions of financial, monetary policy, and other shocks.
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Description: Full text
Provider: Federal Reserve Bank of Chicago
Part of Series: Working Paper Series
Publication Date: 2016-10-17
Pages: 51 pages