Proceedings of Paris Economics, Finance and Business Conference
13 - 15 April 2015, Crowne Plaza Hotel Republique, Paris, France, ISBN: 978-1-922069-73-3
The Role of Financial Depth on the Asymmetric Impact of
Monetary Policy
Mustafa Caglayan, Ozge Kandemir Kocaaslan* ans Kostas Mouratidis
This paper investigates the role of financial markets in evaluating the asymmetric impact
of monetary policy on real output over the business cycle for the US. We show that
monetary policy has a significant impact on output growth during recessions. We also
show that financial deepening plays an important role by dampening the effects of
monetary policy shocks in recessions. The results are robust to the use of alternative
financial depth and monetary policy shock measures and a different sample period. We
carry out our analysis by implementing an instrumental variable Markov regime switching
methodology.
Keywords: Output growth; asymmetric effects; monetary policy; financial depth; Markov
switching; instrumental variable.
JEL Classification: E32, E52.
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Mustafa Caglayan, School of Management and Languages, Heriot-Watt University, UK
Kostas Mouratidis, Department of Economics, University of Sheffield, UK
*
Department of Economics, Faculty of Economics and Administrative Sciences, Hacettepe University
Beytepe Campus, 06800 Cankaya, Ankara, Turkey. E-mail: ozge.kandemir@hacettepe.edu.tr, Tel:+9
0312 2978650, Fax:+9 0312 2992003