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Do monetary policy shocks generate TAR or STAR dynamics in output?

Author

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  • Donayre Luiggi

    (Labovitz School of Business and Economics, Department of Economics, University of Minnesota – Duluth, 1318 Kirby Drive, Duluth, MN 55812)

Abstract
This paper studies whether the relationship between monetary policy shocks of different size and output is better described by threshold autoregressive (TAR) or smooth transition autoregressive (STAR) dynamics. Using a Bayesian framework, a TAR process and a STAR process are formally compared within an unobserved components model of output, augmented with a monetary policy variable. The Bayesian model comparison favors the notion that the dynamics are nonlinear and better described by a smooth transition between regimes, which suggests that aggregation plays a role in the dynamics between monetary policy and output. This evidence is further supported by the results of a model that uses output data at the sectoral level: when more disaggregated data are employed, the transition between regimes is more abrupt. Moreover, the results show that, when the transition between regimes is smooth, large monetary policy shocks identified as the residuals of a VAR are neutral, consistent with the implications of menu-costs models.

Suggested Citation

  • Donayre Luiggi, 2015. "Do monetary policy shocks generate TAR or STAR dynamics in output?," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 19(2), pages 227-247, April.
    • Handle: RePEc:bpj:sndecm:v:19:y:2015:i:2:p:227-247:n:2
    DOI: 10.1515/snde-2013-0038
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    References listed on IDEAS

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    3. Donayre, Luiggi, 2014. "Estimated Thresholds In The Response Of Output To Monetary Policy: Are Large Policy Changes Less Effective?," Macroeconomic Dynamics, Cambridge University Press, vol. 18(1), pages 41-64, January.
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    8. Weise, Charles L, 1999. "The Asymmetric Effects of Monetary Policy: A Nonlinear Vector Autoregression Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 85-108, February.
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    Cited by:

    1. Ahmad Yamin & Donayre Luiggi, 2016. "Outliers and persistence in threshold autoregressive processes," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 20(1), pages 37-56, February.

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    More about this item

    Keywords

    asymmetry; Bayesian analysis; MCMC methods; monetary policy; smooth transition autoregressive process; threshold autoregressive process; unobserved components model;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C22 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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