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Private Sector Debt, Financial Constraints, and the Effects of Monetary Policy: Evidence from the US
Author(s) -
Breitenlechner Max,
Scharler Johann
Publication year - 2020
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12349
Subject(s) - monetary policy , economics , debt , private sector , monetary economics , credit channel , macroeconomics , inflation targeting , economic growth
We characterize the response of U.S. real GDP to monetary policy shocks conditional on the level of private sector debt and the degree to which financial constraints are binding. To incorporate state‐dependent effects of monetary policy, we use the local projection framework. We find that although the amount of private sector debt potentially weakens the monetary policy transmission mechanism, policy shocks exert substantially larger effects on output when high private debt coincides with binding financial constraints.