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Monetary Policy Matters

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  • Christopher W. Crowe
  • S. Mahdi Barakchian
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    Abstract

    Conventional VAR and non-VAR methods of identifying the effects of monetary policy shocks on the economy have found a negative output response to monetary tightening using U.S. data over the 1960s-1990s. However, we show that these methods fail to find this contractionary effect when the sample is restricted to the period since the 1980s, apparently due to changes in the policymaking environment that reduce their effectiveness. Identifying policy shocks using Fed Funds futures data, we recover the contractionary effect of monetary tightening on output and find that almost half of output variation over the period appears due to policy shocks.

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    Bibliographic Info

    Paper provided by International Monetary Fund in its series IMF Working Papers with number 10/230.

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    Length: 65
    Date of creation: 01 Oct 2010
    Date of revision:
    Handle: RePEc:imf:imfwpa:10/230

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    Related research

    Keywords: Monetary policy; Central bank policy; Economic models; External shocks; inflation; gdp deflator; monetary economics; contractionary monetary policy; price level; central bank; monetary shocks; monetary fund; monetary instrument; monetary shock; money market; monetary authority; monetary policy reaction function; price stability; transmission of monetary policy; monetary stance; monetary instruments; inflationary pressure; inflation concerns; international monetary policy; monetary regimes; expansionary monetary policy; monetary aggregates; inflation forecasts; macroeconomic stability; monetary policy rules; inflationary expectations; general price level; treasury bill futures; monetary authorities; monetary regime; money demand;

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    References

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    1. Thapar, Aditi, 2008. "Using private forecasts to estimate the effects of monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(4), pages 806-824, May.
    2. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    3. Hanson, Michael S., 2004. "The "price puzzle" reconsidered," Journal of Monetary Economics, Elsevier, vol. 51(7), pages 1385-1413, October.
    4. Christopher Crowe & Ellen E. Meade, 2007. "The Evolution of Central Bank Governance around the World," Journal of Economic Perspectives, American Economic Association, vol. 21(4), pages 69-90, Fall.
    5. Monika Piazzesi & Eric T. Swanson, 2006. "Futures prices as risk-adjusted forecasts of monetary policy," Working Paper Series 2006-23, Federal Reserve Bank of San Francisco.
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    Cited by:
    1. Becker, Bo & Ivashina, Victoria, 2014. "Cyclicality of credit supply: Firm level evidence," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 76-93.

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