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Studies in Nonlinear Dynamics & Econometrics

Ed. by Mizrach, Bruce

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Volume 18, Issue 3


The effects of the monetary policy stance on the transmission mechanism

Ana Beatriz Galvao / Massimiliano Marcellino
Published Online: 2013-10-30 | DOI: https://doi.org/10.1515/snde-2012-0027


This paper contributes to the literature on changes in the transmission mechanism of monetary policy by introducing a model whose parameter evolution explicitly depends on the stance of monetary policy. The model, a structural break endogenous threshold VAR, also captures changes in the variance of shocks, and allows for a break in the parameters at an estimated time. We show that the transmission is asymmetric depending on the extention of the deviation of the actual policy rate from the one required by the Taylor rule. When the policy stance is tight – actual rate is higher than the one implied by the Taylor rule – contractionary shocks have stronger negative effects on output and prices.

This article offers supplementary material which is provided at the end of the article.

Keywords: asymmetries; great moderation; monetary policy transmission; threhold models; time-varying models

JEL classification: E52; C51


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About the article

Corresponding author: Dr. Ana Beatriz Galvao, University of Warwick, Warwick Business School, CV4 7AL, Coventry, UK, Phone: +44-24-76528202, e-mail:

Published Online: 2013-10-30

Published in Print: 2014-05-01

Our model includes an equation for the policy rate with own lags, output and prices on the right-hand side, similar to a reduced-form Taylor rule, and their parameters may change with the monetary policy stance, which is related with economic conditions.

The one-step-at-time approach estimates first one threshold, then conditional on this value, a second threshold is estimated. Then using the second estimated threshold, a new threshold is estimated. And finally, this procedure is repeated one more time conditional on the new threshold computed in the previous step to deliver the estimates of both thresholds.

Note, however, that Taylor (1993) suggested the rule using output deviations from a linear trend, instead of annual growth as in equation (8). Because a constant growth rate may not be adequate to detrend output over a long sample, as we do, and the problems arising from using filtering methods in real time [as explained by Orphanides (2001)], we consider the use of annual growth as a good proxy for a measure of current economic activity, see also Van Norden (1995).

Specifically, we require at least 30% of observations in each regime. In the case of an SB-ET-VAR model, this restriction applies separately for each subsample. Other papers in the literature normally set the proportion equal to 10 or 15%. However, because of the relative short sample size and the impact that parameter estimates have on impulse responses, we prefer to consider at least 30% of observations in each regime.

Results available on request.

Results are not shown to save space, but are available on request.

We only present results for positive shocks. Preliminary results with the chosen model indicate no significant asymmetries in the dynamic responses from the sign of the shocks even when comparing increases with decreases of 100 basis points.

Citation Information: Studies in Nonlinear Dynamics & Econometrics, Volume 18, Issue 3, Pages 217–236, ISSN (Online) 1558-3708, ISSN (Print) 1081-1826, DOI: https://doi.org/10.1515/snde-2012-0027.

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