Title : The Evolution of the Response of Credit Spread Variables to Monetary Policy Shocks

Author : Do-wan Kim(Bank of Korea)

This study reexamines the impact of monetary policy shocks on credit spread variables and their mediating role in the transmission of monetary policy shocks to output in the context of time-varying parameters. A novel identification strategy is introduced to address the endogeneity issue when applying an external instrument approach to time-varying parameter vector autoregression. Using the new identification strategy, we confirm that the response of credit spread variables to a monetary policy shock has evolved. Notably, the response of excess bond premium has become more sensitive since the 2000s. The influence of monetary policy shocks on the output, mediated through excess bond premium, has become more pronounced since the 2000s. These findings hold even when the ordering of variables is changed.