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The Impact of Monetary Targeting in the United States: 1976-1984

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Carl E. Walsh

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Abstract

This paper attempts to assess empirically the impact on output and inflation of monetary policy in the U-S. during the period of M1 targeting from 1976 to 1984. The impact of policy shocks on output and inflation, and the impact of aggregate demand, aggregate supply and money demand shocks on M1 and the Fed's target path, are examined through the use of impulse response functions. These response functions are based on an orthogonalization of VAR residuals derived from an estimated structural model. The VAR specification reflects the finding that M1 and the Fed's target for M1 are cointegrated. The evidence suggests that money supply shocks and shocks to M1 target have accounted for little of the observed volatility of output or inflation. However, the induced policy response to aggregate demand and supply shocks has contributed to subsequent inflation.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2384.

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Date of creation: Sep 1987
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Publication status: published as Walsh, Carl E. "Monetary Targeting And Inflation: 1976-1984," FRB San Francisco - Economic Review, 1987, v1987(1), 5-16.
Handle: RePEc:nbr:nberwo:2384

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. William Poole, 1976. "Interpreting the Fed's Monetary Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1976-1), pages 247-260. [Downloadable!]
  2. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June. [Downloadable!] (restricted)
  3. McCallum, Bennett T, 1985. "On Consequences and Criticisms of Monetary Targeting," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 17(4), pages 570-97, November. [Downloadable!] (restricted)
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  4. Gould, J. P. & Miller, M. H. & Nelson, C. R. & Upton, C. W., 1978. "The stochastic properties of velocity and the quantity theory of money," Journal of Monetary Economics, Elsevier, vol. 4(2), pages 229-248, April. [Downloadable!] (restricted)
  5. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May. [Downloadable!] (restricted)
  6. Meltzer, A.H. & heinmann, H.E. & Jordan, J.L. & Levy, M.D. & losser, C.I. & Poole, W. & Rasche, R.H. & Schwartz, A.J., 1991. "Shadow Open Market Committee; Policy Statement and Position Pepers," Papers ip_91-01, Rochester, Business - Industry Policy Studies.
  7. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March. [Downloadable!] (restricted)
  8. Robert J. Barro, 1989. "Interest-Rate Smoothing," NBER Working Papers 2581, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Walsh, Carl E, 1986. "In Defense of Base Drift," American Economic Review, American Economic Association, vol. 76(4), pages 692-700, September. [Downloadable!] (restricted)
  10. Bennett T. McCallum, 1984. "Credibility and monetary policy," Proceedings, Federal Reserve Bank of Kansas City, pages 105-135.
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  11. Roley, V Vance & Walsh, Carl E, 1985. "Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements," The Quarterly Journal of Economics, MIT Press, vol. 100(5), pages 1011-39, Supp.. [Downloadable!] (restricted)
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  12. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February. [Downloadable!] (restricted)
  13. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation, Yale University. [Downloadable!]
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  14. Carl E. Walsh, 1987. "Testing for Real Effects of Monetary Policy Regime Shifts," NBER Working Papers 2116, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  15. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January. [Downloadable!] (restricted)
  16. Marvin Goodfriend, 1986. "Interest rate smoothing and price level trend-stationarity," Working Paper 86-04, Federal Reserve Bank of Richmond.
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  17. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  18. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September. [Downloadable!] (restricted)
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