IMF Working Papers

The Nonlinear Interaction Between Monetary Policy and Financial Stress

By Martín Saldías

August 4, 2017

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Martín Saldías. The Nonlinear Interaction Between Monetary Policy and Financial Stress, (USA: International Monetary Fund, 2017) 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

This paper analyzes the nonlinear relationship between monetary policy and financial stress and its effects on the transmission of shocks to output. Results from a Bayesian Threshold Vector Autoregression (TVAR) model show that the effects of monetary policy shocks on output growth are stronger during normal times than during times of financial stress. Monetary policy shocks are effective to ease stressed financial conditions, but have limited ability to fully contain the buildup of vulnerabilities. These results have important policy implications for central banks’ countercyclical policies under different financial conditions and for “lean against the wind” policies to address financial vulnerabilities.

Subject: Banking, Economic sectors, Financial sector, Financial sector policy and analysis, Financial sector stability, Financial services, Monetary policy, Monetary tightening, Production, Production growth, Yield curve

Keywords: Bayesian threshold vector autoregression, Can monetary policy, Financial condition, Financial sector, Financial sector stability, Financial stress, Financial system, Global, Monetary policy, Monetary policy shock, Monetary policy stance, Monetary policy stimulus, Monetary policy tightening, Monetary policy variable, Monetary tightening, Production growth, Shocks to financial conditions, TVAR model, WP, Yield curve, Yield curve slope

Publication Details

  • Pages:

    34

  • Volume:

    ---

  • DOI:

    ---

  • Issue:

    ---

  • Series:

    Working Paper No. 2017/184

  • Stock No:

    WPIEA2017184

  • ISBN:

    9781484313794

  • ISSN:

    1018-5941

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