The effects of the monetary policy stance on the transmission mechanism

This paper contributes to the literature on changes in the transmission mechanism of monetary policy by introducing a model whose parameter evolution explicitly depends on the stance of monetary policy. The model, a structural break endogenous threshold VAR, also captures changes in the variance of shocks, and allows for a break in the parameters at an estimated time. We show that the transmission is asymmetric depending on the extention of the deviation of the actual policy rate from the one required by the Taylor rule. When the policy stance is tight – actual rate is higher than the one implied by the Taylor rule – contractionary shocks have stronger negative effects on output and prices.