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Monetary policy and sectoral shocks : did the Federal Reserve react properly to the high-tech crisis?

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Author Info

  • Claudio Raddatz
  • Roberto Rigobon

Abstract

The authors present an identification strategy that allows them to study the sectoral effects of monetary policy and the role that monetary policy plays in the transmission of sectoral shocks. They apply their methodology to the case of the United States and find some significant differences in the sectoral responses to monetary policy. They also find that monetary policy is a significant source of sectoral transfers. In particular, a shock to equipment and software investment, which one identifies with the high-tech crisis, induces a response by the monetary authority that generates a temporary boom in residential investment and durables consumption but has almost no effect on the high-tech sector. Finally, the authors perform an exercise evaluating the model's predictions about the automatic and more aggressive monetary policy response to a shock similar to the one that hit the United States in early 2001. They find that the actual drop in interest rates is in line with the predictions of the model.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 3160.

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Date of creation: 01 Nov 2003
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Handle: RePEc:wbk:wbrwps:3160

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Related research

Keywords: Labor Policies; Economic Theory&Research; Financial Intermediation; Payment Systems&Infrastructure; ICT Policy and Strategies; Economic Stabilization; Economic Theory&Research; Macroeconomic Management; Financial Intermediation; ICT Policy and Strategies;

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References

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  1. Christopher A. Sims, 1980. "Comparison of Interwar and Postwar Business Cycles: Monetarism Reconsidered," NBER Working Papers 0430, National Bureau of Economic Research, Inc.
  2. Rudi Dornbusch & Carlo Favero & Francesco Giavazzi, 1998. "Immediate challenges for the European Central Bank," Economic Policy, CEPR & CES & MSH, vol. 13(26), pages 15-64, 04.
  3. Christina D. Romer and David H. Romer., 1989. "Does Monetary Policy Matter? A New Test in the Spirit of Friedman and Schwartz," Economics Working Papers 89-107, University of California at Berkeley.
  4. Dedola, Luca & Lippi, Francesco, 2005. "The monetary transmission mechanism: Evidence from the industries of five OECD countries," European Economic Review, Elsevier, vol. 49(6), pages 1543-1569, August.
  5. Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers 3920, National Bureau of Economic Research, Inc.
  6. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  7. 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.
  8. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
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Cited by:
  1. Karanassou, Marika & Sala, Hector, 2010. "The US inflation-unemployment trade-off revisited: New evidence for policy-making," Journal of Policy Modeling, Elsevier, vol. 32(6), pages 758-777, November.

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