Inflation-regime dependent effects of monetary policy shocks. Evidence from threshold vector autoregressions

We use a threshold vector autoregression to study the effects of monetary policy shocks on the US. Depending on the level of inflation we note important regime dependence in the inflation response to monetary policy shocks.

► We estimate a VAR with threshold effects for the US over the 1965-2007 period. ► We present evidence for significant threshold effects depending on inflation. ► Standard effects of monetary policy shocks are found for the high inflation regime. ► In the low inflation regime inflation declines quicker and there is no price puzzle.