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Are the Effects of Monetary Policy Shocks Big or Small?

  • Olivier Coibion

This paper studies the small estimated effects of monetary policy shocks from standard VARs versus the large effects from the Romer and Romer (2004) approach. The differences are driven by three factors: the different contractionary impetus, the period of reserves targeting, and lag length selection. Accounting for these factors, the real effects of policy shocks are consistent across approaches and most likely medium. Alternative monetary policy shock measures from estimated Taylor rules also yield medium-sized real effects and indicate that the historical contribution of monetary policy shocks to real fluctuations has been significant, particularly during the 1970s and early 1980s. (JEL E32, E43, E52)

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Article provided by American Economic Association in its journal American Economic Journal: Macroeconomics.

Volume (Year): 4 (2012)
Issue (Month): 2 (April)
Pages: 1-32

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Handle: RePEc:aea:aejmac:v:4:y:2012:i:2:p:1-32
Note: DOI: 10.1257/mac.4.2.1
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  1. repec:oup:qjecon:v:115:y:2000:i:1:p:147-180 is not listed on IDEAS
  2. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
  3. Robert B. Barsky & Lutz Kilian, 2002. "Do We Really Know that Oil Caused the Great Stagflation? A Monetary Alternative," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 137-198 National Bureau of Economic Research, Inc.
  4. Faust, Jon & Swanson, Eric T. & Wright, Jonathan H., 2004. "Identifying VARS based on high frequency futures data," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1107-1131, September.
  5. Olivier Coibion & Yuriy Gorodnichenko, 2010. "Monetary Policy, Trend Inflation and the Great Moderation:An Alternative Interpretation," Working Papers 94, Department of Economics, College of William and Mary.
  6. Blanchard, Olivier Jean, 1993. "Consumption and the Recession of 1990-1991," American Economic Review, American Economic Association, vol. 83(2), pages 270-74, May.
  7. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
  8. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-69, June.
  9. Yuriy Gorodnichenko, 2005. "Reduced-Rank Identification of Structural Shocks in VARs," Macroeconomics 0512011, EconWPA.
  10. repec:oup:qjecon:v:120:y:2005:i:1:p:387-422 is not listed on IDEAS
  11. Stacey L. Schreft, 1990. "Credit controls: 1980," Economic Review, Federal Reserve Bank of Richmond, issue Nov, pages 25-55.
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