Monetary policy transmission and trade-offs in the United States: Old and new

Abstract

This study shows that monetary policy transmission in the United States has evolved considerably over the postwar period. Since the mid-1980s, the effects of monetary policy on credit and housing markets have become much stronger relative to the impact on gross domestic product, while the effects on inflation have become weaker. We show that these changes in the relative effects of monetary policy can be explained by several important changes in the monetary transmission mechanism and in the composition of credit aggregates. Most notably, the increasing impact of monetary policy on credit was predominantly driven by an extraordinarily higher responsiveness of mortgage credit and a larger share of mortgages in total credit. These findings imply important changes over time in short-term monetary policy trade-offs between inflation and output stability on the one hand and between financial and macroeconomic stability on the other.