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Reducing our ignorance about monetary policy effects

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  • Eric M. Leeper

Abstract

Business news often gives the impression that the effects of monetary policy on the macroeconomy are well understood and predictable. The author of this article, however, believes that, far from sharing such certainty, policymakers and economists alike have knowledge limited by difficulties in sorting out causal factors in economic data. He holds that monetary policy effects are neither well understood nor easily predicted. ; The article presents five models of private and monetary policy behavior in the United States. Identical policy experiments--an unanticipated one-time monetary policy contraction--performed in each model show different qualitative and quantitative effects of policy from one model to the next. The author considers a variety of methods for ranking the models according to their plausibility and suggests that because each model has its limitations, it would be wise for policy advisors to be eclectic in formulating advice.

Suggested Citation

  • Eric M. Leeper, 1995. "Reducing our ignorance about monetary policy effects," Economic Review, Federal Reserve Bank of Atlanta, issue Jul, pages 1-38.
  • Handle: RePEc:fip:fedaer:y:1995:i:jul:p:1-38:n:v.80no.4
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    Cited by:

    1. Waggoner, Daniel F. & Zha, Tao, 2003. "Likelihood preserving normalization in multiple equation models," Journal of Econometrics, Elsevier, vol. 114(2), pages 329-347, June.
    2. Rómulo A. Chumacero, 2005. "A Toolkit for Analyzing Alternative Policies in the Chilean Economy," Central Banking, Analysis, and Economic Policies Book Series,in: Rómulo A. Chumacero & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (S (ed.), General Equilibrium Models for the Chilean Economy, edition 1, volume 9, chapter 8, pages 261-302 Central Bank of Chile.
    3. Shen, Chung-Hua & Chiang, Thomas Chi-Nan, 1999. "Retrieving the vanishing liquidity effect--a threshold vector autoregressive model," Journal of Economics and Business, Elsevier, vol. 51(3), pages 259-277, May.

    More about this item

    Keywords

    Monetary policy;

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