State Dependence of Monetary Policy Across Business, Credit and Interest Rate Cycles

Abstract

In this paper, PERC Professor Sarah Zubairy, along with co-authors Sami Alpanda and Eleonora Granziera study how phases of the business, credit and interest rate cycles affect the transmission of monetary policy using state-dependent local projection methods and data from 18 advanced economies. Findings show that the impact of monetary policy shocks on output and other macroeco-nomic and �nancial variables is weaker during periods of economic downturns, high household debt, and high interest rates. The authors then build a small-scale theoretical model that points to the presence of collateral and debt-service constraints on household borrowing and re�nancing as potential drivers of state dependence of monetary policy with respect to the business, credit, and interest rate cycles. These �ndings bear signi�cant implications for the transmission of monetary policy and highlight potentially important features to be considered in models used to inform monetary policy decisions.