Has the Transmission of US Monetary Policy Changed Since 2022?

June 21, 2024

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Format: Chicago

Philip Barrett, and Josef Platzer. Has the Transmission of US Monetary Policy Changed Since 2022?, (USA: International Monetary Fund, 2024) accessed November 21, 2024

Disclaimer: IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.

Summary

Activity and inflation responded slowly to the Federal Reserve’s rate hikes in 2022. Was this because the transmission of monetary policy had changed? Or did other shocks offset tighter policy? We use pre-pandemic data to estimate a VAR with monetary policy shocks identified from high-frequency data, and use it as a filter to back out the sequence of monetary policy shocks consistent with data since 2022. We compare these implied shocks to the actual shocks and find the difference statistically significant during February-July 2022. These differences imply that monetary transmission was around 25 percent weaker than normal. Our method accounts for other shocks; allowing them to change to match the post-COVID covariance of the data produces similar results but in a shorter period. We decompose changes in the uncertainty of our estimate and find that colinearity of shocks is generally more important than uncertainty over model parameters. We extend our analysis to central bank information shocks and find Federal Reserve communication was less powerful than usual during 2021.

Subject: COVID-19, Data processing, Econometric analysis, Economic and financial statistics, Health, Inflation, Labor, Labor markets, Prices, Vector autoregression

Keywords: COVID-19, Data processing, Federal Reserve communication, Filtering, Global, Inflation, Labor markets, Monetary Policy, Monetary policy shock, Pandemic data, Rate hike, Semi-structural Identification, Transmission of monetary policy, VAR, Vector autoregression

Publication Details

Pages:

33
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2024/129
Stock No:

WPIEA2024129
ISBN:

9798400281051
ISSN:

1018-5941

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