ABSTRACT
The empirical results appear particularly relevant for policy action. Monetary policy shocks in particular what has recently been called unconventional monetary policy are more likely to be effective when the shocks are sufficiently large and applied during low-growth regimes. The US has the strongest rise of the FSI index and a strong fall of IP in the meltdown. It also shows very strong effects in the low-growth regime: positive shocks decrease output significantly. Positive shocks in a high-growth regime also reduce output, but less significantly. A low-growth regime responds quite sensitively to negative financial stress shocks, increasing banks net worth. So the banking sector-output link seems to be the essential link in modern macroeconomics. The findings are compatible with recent studies which argue that unconventional monetary policy is needed in a depressed economy that is accompanied by a sharp rise in credit spreads, which, more so than asset-price volatility, constitute the dominant component of the stress index.
