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Are the effects of monetary policy shocks big or small?

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  • Olivier Coibion

    () (Department of Economics, College of William and Mary)

Abstract

This paper studies the small estimated effects of monetary policy shocks from standard VAR’s versus the large effects from the Romer and Romer (2004) approach. The differences are driven by three factors: the different contractionary impetus, the period of reserves targeting and lag length selection. Accounting for these factors, the real effects of policy shocks are consistent across approaches and most likely medium. Alternative monetary policy shock measures from estimated Taylor rules also yield medium-sized real effects and indicate that the historical contribution of monetary policy shocks to real fluctuations has been significant, particularly during the 1970s and early 1980s.

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Bibliographic Info

Paper provided by Department of Economics, College of William and Mary in its series Working Papers with number 90.

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Length: 51 pages
Date of creation: 09 May 2011
Date of revision:
Handle: RePEc:cwm:wpaper:90

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Keywords: Monetary Policy; Shocks; Taylor rule;

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  1. Jean Boivin & Marc P. Giannoni, 2003. "Has Monetary Policy Become More Effective?," NBER Working Papers 9459, National Bureau of Economic Research, Inc.
  2. Faust, Jon & Swanson, Eric T. & Wright, Jonathan H., 2004. "Identifying VARS based on high frequency futures data," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1107-1131, September.
  3. Olivier Coibion & Yuriy Gorodnichenko, 2008. "Monetary Policy, Trend Inflation and the Great Moderation: An Alternative Interpretation," NBER Working Papers 14621, National Bureau of Economic Research, Inc.
  4. Robert B. Barsky & Lutz Kilian, 2001. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Working Papers 8389, National Bureau of Economic Research, Inc.
  5. Yuriy Gorodnichenko, 2005. "Reduced-Rank Identification of Structural Shocks in VARs," Macroeconomics 0512011, EconWPA.
  6. 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.
  7. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  8. Stacey L. Schreft, 1990. "Credit controls: 1980," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 25-55.
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Cited by:
  1. Nicolaas Groenewold, 2012. "Australia and the GFC: Saved by Astute Fiscal Policy?," Economics Discussion / Working Papers 12-28, The University of Western Australia, Department of Economics.
  2. Eric Monnet, 2012. "Monetary policy without interest rates. Evidence from France’s Golden Age (1948-1973) using a narrative approach," Working Papers 0032, European Historical Economics Society (EHES).
  3. John Silvia & Lorenz Kueng & Olivier Coibion & Yuriy Gorodnichenko, 2012. "Innocent Bystanders? Monetary Policy and Inequality in the U.S," IMF Working Papers 12/199, International Monetary Fund.
  4. Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.

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