Nonlinearities and state-dependence in the monetary transmission mechanism: Evidence from a commodity-dependent economy

This paper examines the nonlinearity and state-dependence of the monetary policy transmission mechanism in Mongolia—a commodity-dependent developing economy—using local projection methods. Our empirical analysis yields several novel findings. First, transmission lags vary with economic conditions, being longer during recessions compared to expansions. Second, the effectiveness of monetary policy in stimulating GDP is enhanced during recessions, periods of monetary loosening, and high inflation regimes, whereas its capacity to control inflation is reduced during expansions. Monetary policy pass-through to bank interest rates is more pronounced in periods combining recession and monetary tightening. Third, expansionary monetary policy shocks have stronger effects, leading to a depreciation of the real effective exchange rate and sharp declines in bank interest rates. These findings are robust across various model specifications, highlighting the importance of accounting for economic states when assessing the effectiveness of monetary policy.