Explaining the strength and the efficiency of monetary policy transmission : a panel of impulse responses from a time-varying parameter model
Abstract
This paper analyzes both the cross-sectional and time variation in aggregate monetary policy transmission from nominal short term interest rates to price level. Using Bayesian TVP-VARs where the structural interest rate shocks are identified by sign restrictions, we show that monetary policy transmission became stronger over the last decades.
This applies both to developed and emerging economies. Monetary policy sacrifice ratios gradually decreased from their peak in the 1980's.
Exploring the cross-country and time variation in panel regressions, we show that when a country adopted inflation targeting regime, monetary transmission became stronger and sacrifice ratios decreased. In periods of banking crises, the transmission from monetary policy interest rate shocks to prices is weaker and the related costs in output are higher.
Further, countries with higher domestic credit to GDP have stronger transmission while countries with higher foreign debt seem to be less influenced by domestic monetary policy.