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Monetary Policy and Sectoral Shocks: Did the FED react properly to the High-Tech Crisis?

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  • Claudio Raddatz
  • Roberto Rigobon

Abstract

This paper presents an identification strategy that allows us to study both the sectoral effects of monetary policy and the role that monetary policy plays in the transmission of sectoral shocks. We apply our methodology to the case of the U.S. and find some significant differences in the sectorial responses to monetary policy. We also find that monetary policy is a significant source of sectoral transfers. In particular, a shock to Equipment and Software investment, which we naturally identify with the High-tech crises, induces a response by the monetary authority that generates a temporary boom in Residential Investment and Durable Consumption but has almost no effect on the high-tech sector. Finally, we perform an exercise evaluating what the model predicts regarding the automatic and a more aggressive monetary policy response to a shock similar to the one that hit the U.S. in early 2001. We find that the actual drop in interest rates we have observed is in line with the predictions of the model.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9835.

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Date of creation: Jul 2003
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Handle: RePEc:nbr:nberwo:9835

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  1. Ben Bernanke, 1990. "The Federal Funds Rate and the Channels of Monetary Transnission," NBER Working Papers 3487, National Bureau of Economic Research, Inc.
  2. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  3. Rudiger Dornbusch & Carlo A. Favero & Francesco Giavazzi, 1998. "The Immediate Challenges for the European Central Bank," NBER Working Papers 6369, National Bureau of Economic Research, Inc.
  4. Bernanke, Ben & Gertler, Mark, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Working Papers, C.V. Starr Center for Applied Economics, New York University 95-15, C.V. Starr Center for Applied Economics, New York University.
  5. Dedola, Luca & Lippi, Francesco, 2005. "The monetary transmission mechanism: Evidence from the industries of five OECD countries," European Economic Review, Elsevier, Elsevier, vol. 49(6), pages 1543-1569, August.
  6. Rudebusch, G.D., 1996. "Do Measures of Monetary Policy in a VAR Make Sense?," Papers, Banca Italia - Servizio di Studi 269, Banca Italia - Servizio di Studi.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  8. Christopher A. Sims, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," NBER Working Papers 0430, National Bureau of Economic Research, Inc.
  9. Christina D. Romer & David H. Romer, 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," NBER Chapters, in: NBER Macroeconomics Annual 1989, Volume 4, pages 121-184 National Bureau of Economic Research, Inc.
  10. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 13(26), pages 15-64, 04.
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Cited by:
  1. Marika Karanassou & Hector Sala & Dennis J. Snower, 2007. "The Evolution of Inflation and Unemployment: Explaining the Roaring Nineties," Working Papers, Queen Mary, University of London, School of Economics and Finance 604, Queen Mary, University of London, School of Economics and Finance.
  2. Karanassou, Marika & Sala, Hector, 2009. "Productivity Growth and the Phillips Curve: A Reassessment of the US Experience," IZA Discussion Papers 4299, Institute for the Study of Labor (IZA).
  3. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, Wiley Blackwell, vol. 24(1), pages 1-51, 02.
  4. Gary L. Shelley & Frederick H. Wallace, 2004. "Long Run Effects of Money on Real Consumption and Investment in the U.S," Macroeconomics, EconWPA 0404007, EconWPA, revised 06 Apr 2004.
  5. Karanassou, Marika & Sala, Hector, 2010. "The US inflation-unemployment trade-off revisited: New evidence for policy-making," Journal of Policy Modeling, Elsevier, Elsevier, vol. 32(6), pages 758-777, November.
  6. Marika Karanassou & Hector Sala, 2009. "The US Inflation-Unemployment Tradeoff: Methodological Issues and Further Evidence," Working Papers, Queen Mary, University of London, School of Economics and Finance 647, Queen Mary, University of London, School of Economics and Finance.
  7. Llaudes, Ricardo, 2007. "Monetary policy shocks in a two-sector open economy: an empirical study," Working Paper Series, European Central Bank 0799, European Central Bank.
  8. Michel Beine & Pierre-Yves Preumont & Ariane Szafarz, 2006. "Sector diversification during crises: a European perspective," DULBEA Working Papers, ULB -- Universite Libre de Bruxelles 06-07.RS, ULB -- Universite Libre de Bruxelles.
  9. Alam, Tasneem & Waheed, Muhammad, 2006. "The monetary transmission mechanism in Pakistan: a sectoral analysis," MPRA Paper 2719, University Library of Munich, Germany, revised 13 Apr 2007.

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