How Has the Monetary Transmission Mechanism Evolved Over Time

By Jean Boivin, Michael T. Kiley, Frederic S. Mishkin. 2010

523 citations recorded by the source corpus.

We discuss the evolution in macroeconomic thought on the monetary policy transmission mechanism and present related empirical evidence. The core channels of policy transmission - the neoclassical links between short-term policy interest rates, other asset prices such as long-term interest rates, equity prices, and the exchange rate, and the consequent effects on household and business demand - have remained steady from early policy-oriented models (like the Penn-MIT-SSRC MPS model) to modern dynamic-stochastic-general-equilibrium (DSGE) models. In contrast, non-neoclassical channels, such as credit-based channels, have remained outside the core models. In conjunction with this evolution in theory and modeling, there have been notable changes in policy behavior (with policy more focused on price stability) and in the reduced form correlations of policy interest rates with activity in the United States. Regulatory effects on credit provision have also changed significantly. As a result, we review the empirical evidence on the changes in the effect of monetary policy actions on real activity and inflation and present new evidence, using both a relatively unrestricted factor-augmented vector autoregression (FAVAR) and a DSGE model. Both approaches yield similar results: Monetary policy innovations have a more muted effect on real activity and inflation in recent decades as compared to the effects before 1980. Our analysis suggests that these shifts are accounted for by changes in policy behavior and the effect of these changes on expectations, leaving little role for changes in underlying private-sector behavior (outside shifts related to monetary policy changes).

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/6a9c5c264cb492778ce2b90c9523832f889f0e42

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Citations in the corpus

Trusting the Bankers: A New Look at the Credit Channel of Monetary Policy (2015, unknown): “the banking sector (see e.g. the forthcoming chapters in the Handbook of Monetary Policy, in particular Adrian and Shin, 2009; Boivin et al., 2009; and Gertler and Kiyotaki, 2009).”
Monetary Policy Surprises, Credit Costs, and Economic Activity † (2014, background): “Accordingly, in assessing how monetary policy influence credit costs, it is important to account for the role of forward 1See Boivin, Kiley, and Mishkin (2010) for a recent survey. guidance.”
Bank Market Power and Monetary Policy Transmission: Evidence from a Structural Estimation (2020, result): “This result is consistent with the existing evidence in the literature that monetary policy seems to have more muted effect on real activity and inflation in recent decades (Boivin, Kiley, and Mishkin 2010).”
International Channels of Transmission of Monetary Policy and the Mundellian Trilemma (2015, unknown): “For a recent survey on monetary trasmission mechanisms see Boivin et al. (2010).”
Financial Conditions Indexes: A Fresh Look after the Financial Crisis (2010, background): “The recent analysis of the monetary transmission mechanism by Boivin et al. (2009) classifies these channels as neoclassical and non-neoclassical.”
Macroeconomic Shocks and Their Propagation (2016, unknown): “Boivin et al. (2010) discuss various reasons why the monetary transmission mechanism might have changed, such as changes in the regulatory environment affecting credit and the anchoring of expectations.”
Interest Rates and Equity Extraction During the Housing Boom (2016, unknown): “Research in this area is ongoing in part because of significant institutional and technological changes to the financial system that may have altered the transmission of monetary policy to the real economy (Boivin et al. 2010).”