Title: The interplay between financial conditions and monetary policy shocks
Authors: Luca Benzoni - Federal Reserve Bank of Chicago (United States) [presenting]
Marco Bassetto - Federal Reserve Bank of Chicago (United States)
Trevor Serrao - Federal Reserve Bank of Chicago (United States)
Abstract: An empirical study is conducted concerning the interplay between monetary policy and financial conditions shocks. We find that such shocks have a significant and similar impact on the real economy, though with different degrees of persistence, and the systematic fed funds rate response to a financial shock contributes to bringing the economy back towards its trend. However, a binding zero lower bound on policy rates can prevent policy-makers from leaning against the wind, with a significant cost in terms of output and investment. We illustrate these conclusions in a retrospective analysis of the U.S. economy over the past 20 years, in which we decompose the realization of economic variables into the contributions of financial, monetary policy, and other shocks.