A realistic model for official interest rate movements and their consequences

TitleA realistic model for official interest rate movements and their consequences
Publication TypeJournal Article
Year of Publication2011
AuthorsTena, JD, Otranto, E
JournalApplied Economics
Volume43
Issue29
Pagination4431-4447
Abstract

This article extends the Vector Autoregression (VAR) methodology to examine the consequences of monetary policy decisions by considering two types of nonlinearities in the determination of official interest rates: (1) the asymmetry related to the different nature of the discrete and infrequent positive and negative interest rate movements determined by central bankers and (2) the convexity in the transmission of policy shocks induced by the nonnegativity constraint in interest rates. For the UK, we find some evidence of both types of asymmetries. In the US, responses to unexpected interest rate shocks are far more symmetric. Results highlight the importance of considering all types of asymmetries when studying monetary transmission.

URLhttp://www.tandfonline.com/doi/abs/10.1080/00036846.2010.491463
DOI10.1080/00036846.2010.491463