TY - BOOK ID - 85599353 TI - What Do Monetary Contractions Do? Evidence From Large, Unanticipated Tightenings PY - 2018 SN - 1484379462 PB - Washington, D.C. : International Monetary Fund, DB - UniCat KW - Macroeconomics KW - Economics: General KW - International Economics KW - Foreign Exchange KW - Informal Economy KW - Underground Econom KW - Economic & financial crises & disasters KW - Economics of specific sectors KW - Financial crises KW - Economic sectors KW - Currency crises KW - Informal sector KW - Economics UR - https://www.unicat.be/uniCat?func=search&query=sysid:85599353 AB - As the “Volcker shock” is believed to have generated useful information on the effects of monetary policy, this paper develops a simple procedure to identify other unanticipated monetary contractions. The approach is applied to a panel data set spanning 162 countries (over the period 1970-2017), in which it identifies 147 large monetary contractions. The procedure selects episodes where a protracted period of loose monetary policy was suddenly followed by sizeable nominal interest rate increases. Focusing on contractions of significant size increases the signal-to-noise ratio, while they are unlikely to be accompanied by confounding “information effects” (markets interpreting a rate hike as the Central Bank being optimistic about the real side of the economy). A subsequent panel VAR analysis suggests that a 100-basis point rate hike reduces real GDP by 0.5 percent. This reduction in output seems to be persistent, pointing to a certain degree of hysteresis. The price level falls by 1.5 percent, indicating that the medium-/long-run impact of contractionary monetary shocks is not characterized by a neo-Fisherian response. Advanced economies appear to display more price stickiness than emerging/developing countries, as the former combine a more muted price response with a larger effect on output. ER -