State-Dependent and Time-Varying Effects of Monetary Policy

Nonlinear models with Bayesian inference represent econometric techniques used to assess the monetary policy transmission mechanism. This paper provides two different approaches of vector autoregressive models to outline potential regime-dependent and time-varying effects: a two-state Markov-Switching model with time-invariant transition probabilities and a time-varying vector autoregressive model with stochastic volatility. The empirical results for the Romanian economy indicate the existence of asymmetric regime-dependent responses to monetary policy shock. Regarding the time-varying model, the first part of the period reveals a more cautious central bank behavior, with relatively low responses to shock, while recently, higher responses indicate improvements in the transmission of shocks.