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Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz

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Christina D. Romer
David H. Romer

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Abstract

This paper uses the historical record to isolate episodes in which there were large monetary disturbances not caused by output fluctuations. It then tests whether these monetary changes have important real effects. The central part of the paper is a study of postwar U.S. monetary history. We identify six episodes in which the Federal Reserve in effect decided to attempt to create a recession to reduce inflation. We find that a shift to anti-inflationary policy led, on average, to a rise in the unemployment rate of two percentage points, and that this effect is highly statistically significant and robust to a variety of changes in specification. We reach three other major conclusions. First, the real effects of these monetary disturbances are highly persistent. Second, the six shocks that we identify account for a considerable fraction of postwar economic fluctuations. And third, evidence from the interwar era also suggests that monetary disturbances have large real effects.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2966.

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Date of creation: Feb 1990
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Publication status: published relationship to a non-chapter. This should not happen. Please contact NBER.
Handle: RePEc:nbr:nberwo:2966

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