Centre for Vocational Education Research LSE RSS Email Facebook Twitter


CEP discussion paper
Pushing On a String: US Monetary Policy is Less Powerful in Recessions
Silvana Tenreyro and Gregory Thwaites
May 2013
Paper No' CEPDP1218:
Full Paper (pdf)

JEL Classification: E52; E32

Tags: asymmetric effects of monetary policy; transmission mechanism; recession; durable goods; local projection methods

We estimate the impulse response of key US macro series to the monetary policy shocks identified by Romer and Romer (2004), allowing the response to depend flexibly on the state of the business cycle. We find strong evidence that the effects of monetary policy on real and nominal variables are more powerful in expansions than in recessions. The magnitude of the difference is particularly large in durables expenditure and business investment. The effect is not attributable to differences in the response of fiscal variables or the external finance premium. We find some evidence that contractionary policy shocks have more powerful effects than expansionary shocks. But contractionary shocks have not been more common in booms, so this asymmetry cannot explain our main finding.