Federal Reserve Bank of Chicago
Working Paper Series
The Interplay Between Financial Conditions and Monetary Policy Shocks
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.
Cite this item
Marco Bassetto & Luca Benzoni & Trevor Serrao, The Interplay Between Financial Conditions and Monetary Policy Shocks, Federal Reserve Bank of Chicago, Working Paper Series WP-2016-11, 17 Oct 2016.
- E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
Keywords: Excess bond premium; financial conditions; monetary policy; zero lower bound
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