A realistic model for official interest rate movements and their consequences |
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| Authors: | Juan de Dios Tena Edoardo Otranto |
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| Institution: | 1. Departamento de Estadística , Universidad Carlos III , C/Madrid 126, 28903 Getafe, Madrid;2. Dipartimento di Economia, Impresa e Regolamentazione , Università degli Studi di Sassari , Via Torre Tonda 34-07100, Sassari, Italy juande@uniss.it;4. Dipartimento di Economia, Impresa e Regolamentazione , Università degli Studi di Sassari , Via Torre Tonda 34-07100, Sassari, Italy;5. CRENoS , Sassari, Italy |
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| Abstract: | This article extends the Vector Autoregression (VAR) methodology to examine the consequences of monetary policy decisions by considering two types of nonlinearities in the determination of official interest rates: (1) the asymmetry related to the different nature of the discrete and infrequent positive and negative interest rate movements determined by central bankers and (2) the convexity in the transmission of policy shocks induced by the nonnegativity constraint in interest rates. For the UK, we find some evidence of both types of asymmetries. In the US, responses to unexpected interest rate shocks are far more symmetric. Results highlight the importance of considering all types of asymmetries when studying monetary transmission. |
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