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Monetary Shocks in the G-6 Countries: Is There a Puzzle?

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  • Ben S.C. Fung
  • Marcel Kasumovich
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    Abstract

    This paper attempts to reduce the uncertainty about the dynamics of the monetary transmission mechanism. Central to this attempt is the identification of monetary policy shocks. Recently, VAR approaches that use over-identifying restrictions have shown success in isolating such shocks. This paper examines monetary shocks identified by long-run cointegration restrictions and the assumption of long-run money neutrality in exactly identified VAR models across six industrialized countries. The short-run dynamics corresponding to a monetary shock can be interpreted as a monetary policy shock. The results suggest that the stock of money has an active role in the transmission mechanism.

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    File URL: http://www.bankofcanada.ca/wp-content/uploads/2010/05/wp97-7.pdf
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    Bibliographic Info

    Paper provided by Bank of Canada in its series Working Papers with number 97-7.

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    Length: 29 pages
    Date of creation: 1997
    Date of revision:
    Handle: RePEc:bca:bocawp:97-7

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    Related research

    Keywords: Economic models; International topics; Transmission of monetary policy;

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    1. Robert G. King & Charles I. Plosser & James H. Stock & Mark W. Watson, 1991. "Stochastic trends and economic fluctuations," Working Paper Series, Macroeconomic Issues 91-4, Federal Reserve Bank of Chicago.
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    3. Grilli, Vittorio & Roubini, Nouriel, 1996. "Liquidity models in open economies: Theory and empirical evidence," European Economic Review, Elsevier, vol. 40(3-5), pages 847-859, April.
    4. Hoffman, Dennis L. & Rasche, Robert H. & Tieslau, Margie A., 1995. "The stability of long-run money demand in five industrial countries," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 317-339, April.
    5. Donald W.K. Andrews, 1990. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Cowles Foundation Discussion Papers 943, Cowles Foundation for Research in Economics, Yale University.
    6. Osterwald-Lenum, Michael, 1992. "A Note with Quantiles of the Asymptotic Distribution of the Maximum Likelihood Cointegration Rank Test Statistics," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 54(3), pages 461-72, August.
    7. Gonzalo, Jesus & Ng, Serena, 2001. "A systematic framework for analyzing the dynamic effects of permanent and transitory shocks," Journal of Economic Dynamics and Control, Elsevier, vol. 25(10), pages 1527-1546, October.
    8. Gerlach, Stefan & Smets, Frank, 1995. "The Monetary Transmission Mechanism: Evidence from the G-7 Countries," CEPR Discussion Papers 1219, C.E.P.R. Discussion Papers.
    9. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
    10. David B. Gordon & Eric M. Leeper, 1993. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 93-5, Federal Reserve Bank of Atlanta.
    11. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
    12. Ben Fung & Rohit Gupta, . "Searching for the Liquidity Effect in Canada," Working Papers 94-12, Bank of Canada.
    13. Fisher, Lance A. & Fackler, Paul L. & Orden, David, 1995. "Long-run identifying restrictions for an error-correction model of New Zealand money, prices and output," Journal of International Money and Finance, Elsevier, vol. 14(1), pages 127-147, February.
    14. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," Working Paper 94-2, Federal Reserve Bank of Atlanta.
    15. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
    16. von Hagen, J, 1995. "Inflation and Monetary Targeting in Germany," Papers 03, American Institute for Contemporary German Studies-.
    17. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
    18. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
    19. Gonzalo, Jesus, 1994. "Five alternative methods of estimating long-run equilibrium relationships," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 203-233.
    20. Grilli, Vittorio & Roubini, Nouriel, 1992. "Liquidity and exchange rates," Journal of International Economics, Elsevier, vol. 32(3-4), pages 339-352, May.
    21. Johansen, Soren & Juselius, Katarina, 1990. "Maximum Likelihood Estimation and Inference on Cointegration--With Applications to the Demand for Money," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 52(2), pages 169-210, May.
    22. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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    Cited by:
    1. Todd Potts & David Yerger, 2010. "Variations Across Canadian Regions in the Sensitivity to U.S. Monetary Policy," Atlantic Economic Journal, International Atlantic Economic Society, vol. 38(4), pages 443-454, December.

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