The State-Dependence of Monetary Policy Transmission Mechanisms

Abstract

The literature regarding the effects of monetary policy announcements on markets is generally focused on the pre-2007 period and these effects are well-understood and widely discussed. This paper examines the pre-2007, crisis, and post-2008 periods using high-frequency data and finds evidence that monetary policy announcements have estimated effects that depend on the state of the economy. Moreover, this paper finds that intermeeting announcements during recessions produce substantially different estimated effects than regularly scheduled announcements. This in turn implies that the transmission mechanisms that produce the observed effects vary in strength depending on the state of the economy. The indicators that are measured include S&P 500 returns, real rates, inflation, the prime rate, and CRSP turnover. Each indicator displays associations with rate surprises that depend on the state of the economy, providing empirical evidence that monetary policy mechanisms are state-dependent.