Output Variability and the Money-Output Relationship

The present paper incorporates a rolling regression approach to examine the sensitivity of output responses to monetary shocks. In doing so, the paper finds that the impact of monetary shocks is highly variable. Specifically, the output responses are estimated to be significant during the 1970s and 1990s but not during the 1980s. Several recent authors have suggested that the effectiveness of monetary policy is impacted by the stability of the economic environment, i.e., that the noise associated with estimating the true output level makes it difficult for the monetary authority to ¡§hit its target¡¨ or even to estimate the correct target. In this case, supposed optimal policy may produce any number of possible output responses and none of these consistently. The present results provide additional evidence, as the magnitude of output response appears to be negatively related with the degree of output variability.