20240620-IMF-Has_the_Transmission_of_US_Monetary_Policy_Changed_Since_2022_57页_1mb

Since the US Federal Reserve's aggressive interest rate hikes in March 2022, activity and inflation responded unusually slowly to monetary tightening. This paper investigates whether the transmission mechanism of US monetary policy weakened during this period. Using a factor-augmented vector autoregression (FAVAR) with high-frequency monetary policy shocks, the study compares post-2022 data to a pre-pandemic baseline.

1. Methodology:

   • High-frequency shocks are extracted from financial markets (interest rates and equity prices) around Federal Reserve events.
   • A semi-structural VAR is estimated on pre-COVID data to define a baseline transmission channel.
   • A bootstrap method accounts for model and inference uncertainty.
   • A filter method maps high-frequency shocks to macroeconomic responses under the assumption of unchanged transmission.

2. Key Findings:

   • The pure monetary policy shock filter shows transmission was 25% weaker than average during February-July 2022.
   • Even accounting for changed variances of other shocks, the evidence supports weaker transmission in late 2022.
   • Central bank communication shocks appeared less impactful in 2021.
   • Including speeches in the shock series strengthens the finding of reduced monetary policy transmission.

3. Robustness:

   • Results hold under alternative specifications (lag lengths, factor counts, interest rate measures).
   • Findings on reduced transmission are robust to allowing other shocks' variances to change.
   • The methodology is generalizable for assessing changes in other identified shocks.

Conclusion:
The analysis provides statistically significant evidence that U.S. monetary policy transmission weakened during 2022, requiring tighter policy than historically expected to achieve the same effect.