Pushing on a String: US Monetary Policy Is Less Powerful in Recessions

We investigate how the response of the US economy to monetary policy shocks depends on the state of the business cycle. The effects of monetary policy are less powerful in recessions, especially for durables expenditure and business investment. The asymmetry relates to how fast the economy is growin...

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Bibliographic Details
Published in:American economic journal. Macroeconomics 2016-10, Vol.8 (4), p.43-74
Main Authors: Tenreyro, Silvana, Thwaites, Gregory
Format: Article
Language:English
Subjects:
Analysis
Asymmetry
Business cycles
Central banks
Economic conditions
Economic growth
Expenditures
Federal funding
Federal funds rate
GDP
Gross Domestic Product
Growth rate
Industrial production
Investigations
Macroeconomics
Monetary policy
Prices
Recessions
Studies
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Summary:We investigate how the response of the US economy to monetary policy shocks depends on the state of the business cycle. The effects of monetary policy are less powerful in recessions, especially for durables expenditure and business investment. The asymmetry relates to how fast the economy is growing, rather than to the level of resource utilization. There is some evidence that fiscal policy has counteracted monetary policy in recessions but reinforced it in booms. We also find evidence that contractionary policy shocks are more powerful than expansionary shocks, but contractionary shocks have not been more common in booms. So this asymmetry cannot explain our main finding.
ISSN:1945-7707
1945-7715
DOI:10.1257/mac.20150016