On the transmission of monetary policy shocks

Impact of monetary policy in the short-run

In this paper, Buda et al. investigate whether the impact of monetary policy shocks can be detected within days, rather than months, quarters, or years. The authors use novel, daily-frequency indicators of aggregate consumption, corporate sales, and employment in Spain, together with state-of-the-art high-frequency monetary policy shock identification for the Euro Area. The findings indicate that the economy responds to monetary policy shocks at both short and long lags, which vary in economically significant ways. Specifically:

• Aggregate household consumption starts to decline five days following a contractionary monetary policy shock. At a daily frequency, this decline is sustained, reaching a local trough 93 days from the shock, with consumption falling by 0.35%, followed by another trough at 330 days in which consumption falls by approximately 0.4%.
• Corporate sales – to households and other firms – react more slowly but follow a similar pattern. Their response is statistically significant after 30 days. Sales recover about six months from the shock but fall again in the fourth quarter. The magnitude of this decline is 0.72% at the trough
  taking place 102 days after the shock.
• The response of aggregate employment is statistically detectable early on, relative to consumption and sales, but is initially much smaller, and its decline smoother and steadier. Employment reaches its trough 459 days after the shock, with a fall of 0.25%.

The authors highlight that these short lags are obscured by time aggregation at lower (quarterly) frequencies. In particular, they argue that aggregating data into lower frequency alters the empirical response of consumption, sales, and employment to monetary policy shocks, blurring economically relevant results.

Short and Variable Lags
Authors: Gergely Buda, Vasco M. Carvalho, Giancarlo Corsetti, João B. Duarte, Stephen Hansen, Afonso S. Moura, Álvaro Ortiz, Tomasa Rodrigo, José V.Rodríguez Mora, Guilherme Alves da Silva
From: Barcelona School of Economics, University of Cambridge, European University Institute, Nova School of Business and Economics, University College London, BBVA Research, University of Edinburgh

Impact of monetary policy in the long-run

In this paper, Jordà et al. argue that the real effects of monetary shocks last for over a decade. The authors use a recent macro-history database spanning 125 years and 17 advanced economies and find:

• In response to an exogenous monetary shock, output declines and does not return to its pre-shock trend even twelve years thereafter.
• This hysteresis is due to the fact that capital and TFP experience similar trajectories to output.
• In contrast, total hours worked (both hours per worker and number of workers) return more quickly to the original trend.
• Hysteresis forces are much stronger after tightening shocks than loosening shocks.

The Long-Run Effects of Monetary Policy
Authors: Òscar Jordà, Sanjay R. Singh, Alan M. Taylor
From: Federal Reserve Bank of San Francisco, University of California, Davis, Columbia University