A comparative analysis of the monetary policy transmission channels in the U.S: a wavelet-based approach

ABSTRACT

This paper evaluates competing approaches to assess the effectiveness of transmission channels for the U.S. monetary policy from 1°Q 1995 to 3°Q 2019. While evaluating the competing approaches, the paper follows wavelet coherence approach providing results in time and frequency domain. The results show how money and credit channels work quite well during low volatile periods generally, whereas they suggest that these channels are less effective during periods of financial turmoil and very low interest rate. However, investment-based channels and the bank-lending channel revisited version show some effects also during periods of instability. In more detail, investment-based channels and the bank-lending channel revisited appear to be the most effective monetary policy transmission mechanisms, while the traditional banking-lending channel seems effective only in low volatile periods. Finally, the results for consumption-based channels and international trade-based channels show the least effectiveness.

KEYWORDS:

• Monetary policy transmission mechanism
• wavelet
• unconventional monetary policy
• great recession
• United States

Acknowledgments

As often happens, research work is not a purely individual result, but rather a network of knowledge. With this awareness, we would like to thank prof. Giovanni Battista Pittaluga of the University of Genoa, for sharing his experience on monetary policy and banking subject to improve the paper. A particular thanks to our friend and colleague Simone Lombardini of the University of Genoa for his useful comments. Thanks also to the anonymous referee for providing comments which were very useful for improving the document. Last but not least, a heartfelt thanks to the University of Zagreb that had made possible the collaboration between the authors.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

² See Bernanke and Blinder (1988), Christiano, Eichenbaum, and Evans (1999), Leeper, Sims, and Zha (1996), Romer and Romer (2004), Forni and Gambetti (2010) and, more recently, Arias, Caldara, and Rubio-Ramirez (2015).

² See for example Borio and Zhu (2012) and Matousek et al. (2019).

³ Elliott (1998).

⁴ Cfr. Boivin et al. (2011).

⁵ See Smets and Wouters (2007); Edge, Kiley, and Laforte (2008); Christoffel, Coenen, and Warne (2008).

⁶ Cfr. Bernanke and Blinder (1988).

⁷ See also Bernanke and Gertler (1995).

⁸ Disytat (2010).

⁹ A partially exception is the model developed by Breitenlechner, Scharler, and Sindermann (2016).

¹⁰ Instead of using total bank loans, we opt for the ‘mix’ variable, which is constructed as the ratio of total bank loans to the sum of bank loans and commercial paper issuance. We refer readers to Kashyap et al. (1993) for the full argument as to why the ‘mix’ variable is better than total bank loans in identifying the bank-lending channel.