Small Hikes, Big Cuts: Size Effects in the Transmission of US Monetary Policy

In this thesis, we provide evidence on the nonlinear transmission of monetary policy shocks in a setting with both financial and economic variables. Using a Proxy-SVAR approach, the monetary policy shock is identified by the information-robust MAR extended proxy and embedded, together with its nonlinear transformations, as an exogenous regressor in a VARX model. In the empirical analysis, we find asymmetric effects of monetary policy; contractionary shocks induce larger responses than expansionary shocks of equal magnitude, consistent with the "pushing on a string" metaphor. Furthermore, monetary policy shocks exert persistent and quantitatively significant effects on real economic activity and financial markets, particularly when the shock is both positive and large. The implied inflation-unemployment tradeoffs suggest that contractionary interventions must be gradual and cautious, whereas expansionary policy should be large and concentrated over time.