An Empirical Study of the Cyclical Effects of Monetary Policy in Spain (1977-1997)

In this paper, we provide empirical evidence for the Spanish economy, over the period 1977-97, on whether monetary policy shocks have had different effects on real output growth depending on the state of the business cycle. To do so, we adopt an extension of Hamilton's (1989) Markov Switching Model, as recently proposed by García and Schaller (1995), where shocks to an interest rate policy rule followed by the Bank of Spain are allowed to affect both the growth rate of output and the transition probabilities of moving from one phase to another. The analysis is carried out both at the aggregate level and the sectorial level, with the aim of addressing the following questions: (i) Does monetary policy have the same effect regardless of the current phase of economic fluctuations?, (ii) Does monetary policy only have an incremental effect on output growth rate within a given state or does it also affect the probability of state switch, and, (iii) How do the aggregate and sectorial results compare?