Monetary Transmission in Money Markets: The Not-So-Elusive Missing Piece of the Puzzle

Authors

Zhengyang Chen, University of Northern IowaFollow
Victor Valcarcel, University of Texas at DallasFollow

Comments

First published in Journal of Economic Dynamics and Control, v131 (Oct 2021) published by Elsevier B.V. DOI: https://doi.org/10.1016/j.jedc.2021.104214

Author Manuscript shared via Green Open Access granted by Elsevier B.V.

Document Type

Article

Publication Version

Author Manuscript

Keywords

Price puzzle, Divisia money, interest rate pass-through, time-varying-parameter vector autoregressions (TVP-VAR), time-varying-parameter factor-augmented vector autoregressions (TVP-FAVAR), unexpected monetary policy shocks

Journal/Book/Conference Title

Journal of Economic Dynamics and Control

Volume

131

Abstract

We investigate the effects of U.S. monetary policy shocks from alternative policy indicators for a modern sample encompassing 1988–2020. The choice of the Wu and Xia (2016) shadow federal funds rate leads to persistent price puzzles. These puzzles arise despite inclusion of the usual suspect fixes such as commodity prices, federal funds futures and forward rate data. We find they occur at monthly and quarterly frequencies. We consider alternative indicators with the same broad monetary aggregates Keating et al. (2019) employed in their investigation of a historical sample. They provide a consistent resolution of the price puzzle and they do not require the ad hoc inclusion of commodity prices or futures data. This price puzzle correction is not a feature of our time-varying approach as it also obtains from constant parameter econometric estimation. Our analysis suggests monetary policy has transmitted substantial expansionary effects in money markets in the aftermath of the 2007 Financial Crisis and the decade that followed.

Department

Department of Economics

Original Publication Date

10-30-2021

Object Description

1 PDF File

DOI of published version

10.1016/j.jedc.2021.104214

Repository

UNI ScholarWorks, Rod Library, University of Northern Iowa

Copyright

© 2021 Elsevier B.V. All rights reserved. Author Manuscript shared via Green Open Access granted by Elsevier.

Creative Commons License

This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.

Language

en

File Format

application/pdf

Recommended Citation

Zhengyang Chen, Victor J. Valcarcel, Monetary transmission in money markets: The not-so-elusive missing piece of the puzzle, Journal of Economic Dynamics and Control, Volume 131, 2021, 104214, ISSN 0165-1889, https://doi.org/10.1016/j.jedc.2021.104214.