Is ECB Monetary Policy More Powerful During Expansions?
28 Pages Posted: 31 Jul 2019
Date Written: December 12, 2018
This paper tests whether the effects of ECB monetary policy vary over different phases of the business cycle. It uses local projections to estimate the state-dependent impulse responses of economic activity and prices to monetary policy shocks. These are identified through high-frequency financial market responses after Governing Council meetings. While the impact of monetary policy on economic activity is roughly similar during recessions and expansions, prices respond more strongly during booms. The result holds when the state of the economy is based on measures of resource utilization, rather than on GDP growth rates. Nominal wages also respond more strongly to monetary policy during expansions and when there is no slack in the economy. The empirical findings are consistent with the presence of downward rigidity on nominal wages.
Keywords: monetary policy, business cycle
JEL Classification: E52, E32
Suggested Citation: Suggested Citation