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Identifying monetary policy: a primer

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  • Tao Zha
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Abstract

The question of the quantitative effect of monetary policy has been of considerable debate for decades. Economists' beliefs about it stem largely from theoretical models that imply the effects of changing monetary policy, and different experiments or theories lead to different conclusions. The actual economy, however, is not the result of any such controlled experiment. In the real world, inferences about the quantitative effect of monetary policy must rely on observations of actual economic activity in which many variables are changing simultaneously. ; This article argues that to assess the actual effect of monetary policy requires understanding the interaction among all players in the economy-the central bank, financial market participants, producers, and consumers. The author first explains the conceptual importance of sorting out the central bank's behavior from that of the many other players. He then discusses difficulties involved in sorting out such a behavior in any given country. Finally, he illustrates this sorting-out process with a few examples in the economics literature.

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Bibliographic Info

Article provided by Federal Reserve Bank of Atlanta in its journal Economic Review.

Volume (Year): (1997)
Issue (Month): Q 2 ()
Pages: 26-43

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Handle: RePEc:fip:fedaer:y:1997:i:q2:p:26-43:n:v.82no.2

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Keywords: Money supply ; Monetary policy;

References

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  1. Dias, Francisco C & Machado, Jose A F & Pinheiro, Maximiano R, 1996. "Structural VAR Estimation with Exogeneity Restrictions," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 58(2), pages 417-22, May.
  2. Christina D. Romer & David H. Romer, 1990. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Working Papers 2966, National Bureau of Economic Research, Inc.
  3. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
  4. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  5. James Tobin, 1969. "Money and Income: Post Hoc Ergo Propter Hoc?," Cowles Foundation Discussion Papers 283, Cowles Foundation for Research in Economics, Yale University.
  6. David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 92-13, Federal Reserve Bank of Atlanta.
  7. Eric M. Leeper, 1992. "Facing up to our ignorance about measuring monetary policy effects," Economic Review, Federal Reserve Bank of Atlanta, issue May, pages 1-16.
  8. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  9. Vittorio Grilli & Nouriel Roubini, 1995. "Liquidity and Exchange Rates: Puzzling Evidence from the G-7 Countries," Working Papers 95-17, New York University, Leonard N. Stern School of Business, Department of Economics.
  10. Pierre Duguay & Stephen Poloz, 1994. "The Role of Economic Projections in Canadian Monetary Policy Formulation," Canadian Public Policy, University of Toronto Press, vol. 20(2), pages 189-199, June.
  11. Eichenbaum, Martin & Evans, Charles L, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, MIT Press, vol. 110(4), pages 975-1009, November.
  12. Robert J. Barro, 1976. "Unanticipated Money Growth and Unemployment in the United States," Working Papers 234, Queen's University, Department of Economics.
  13. Leeper, Eric M., 1997. "Narrative and VAR approaches to monetary policy: Common identification problems," Journal of Monetary Economics, Elsevier, vol. 40(3), pages 641-657, December.
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Citations

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Cited by:
  1. Hassan, Rubina & Shahzad, Mirza Muhammad, 2011. "A macroeconometric framework for monetary policy evaluation: A case study of Pakistan," Economic Modelling, Elsevier, vol. 28(1), pages 118-137.
  2. Carlos Esteban Posada, 1997. "Una Presentación Gráfica De La Nueva Teoría De La Política Anti-Inflacionaria Y El Caso Colombiano," BORRADORES DE ECONOMIA 003719, BANCO DE LA REPÚBLICA.
  3. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
  4. Domac, Ilker, 1999. "The distributional consequences of monetary policy : evidence from Malaysia," Policy Research Working Paper Series 2170, The World Bank.
  5. Muhanji, Stella & Malikane, Christopher & Ojah, Kalu, 2013. "Price and liquidity puzzles of a monetary shock: Evidence from indebted African economies," Economic Modelling, Elsevier, vol. 33(C), pages 620-630.

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