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Reducing our ignorance about monetary policy effects


  • Eric M. Leeper


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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    References listed on IDEAS

    1. George G. Kaufman, 1996. "Bank failures, systemic risk, and bank regulation," Working Paper Series, Issues in Financial Regulation WP-96-1, Federal Reserve Bank of Chicago.
    2. Kane, Edward J. & Min-Teh Yu, 1995. "Measuring the true profile of taxpayer losses in the S & L insurance mess," Journal of Banking & Finance, Elsevier, vol. 19(8), pages 1459-1477, November.
    3. Edward J. Kane, 1988. "Changing incentives facing financial-services regulators," Proceedings, Federal Reserve Bank of Cleveland, pages 265-279.
    4. Berger, Allen N. & King, Kathleen Kuester & O'Brien, James M., 1991. "The limitations of market value accounting and a more realistic alternative," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 753-783, September.
    5. Kane, Edward J. & Kaufman, George G., 1993. "Incentive conflict in deposit-institution regulation: evidence from Australia," Pacific-Basin Finance Journal, Elsevier, vol. 1(1), pages 13-29, March.
    6. Bert Ely, 1994. "Financial Innovation and Deposit Insurance: The 100 Percent Cross-Guarantee Concept," Cato Journal, Cato Journal, Cato Institute, vol. 13(3), pages 413-445, Winter.
    7. Davies, Sally M. & McManus, Douglas A., 1991. "The effects of closure policies on bank risk-taking," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 917-938, September.
    8. Kane, Edward J., 1995. "Three paradigms for the role of capitalization requirements in insured financial institutions," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 431-459, June.
    9. Keeley, Michael C, 1990. "Deposit Insurance, Risk, and Market Power in Banking," American Economic Review, American Economic Association, vol. 80(5), pages 1183-1200, December.
    10. Thomas F. Cargill & Michael M. Hutchison & Takatoshi Ito, 1995. "Lessons from financial crisis: the Japanese case," Proceedings 450, Federal Reserve Bank of Chicago.
    11. Chan, Yuk-Shee & Greenbaum, Stuart I & Thakor, Anjan V, 1992. " Is Fairly Priced Deposit Insurance Possible?," Journal of Finance, American Finance Association, vol. 47(1), pages 227-245, March.
    12. Sally M. Davies & Douglas A. McManus, 1991. "The effects of closure policies on bank risk-taking," Finance and Economics Discussion Series 158, Board of Governors of the Federal Reserve System (U.S.).
    13. Jones, David S. & King, Kathleen Kuester, 1995. "The implementation of prompt corrective action: An assessment," Journal of Banking & Finance, Elsevier, vol. 19(3-4), pages 491-510, June.
    14. Rebecca Demsetz & Marc R. Saidenberg & Philip E. Strahan, 1996. "Banks with something to lose: the disciplinary role of franchise value," Economic Policy Review, Federal Reserve Bank of New York, issue Oct, pages 1-14.
    15. Calomiris, Charles W., 1990. "Is Deposit Insurance Necessary? A Historical Perspective," The Journal of Economic History, Cambridge University Press, vol. 50(02), pages 283-295, June.
    16. George G. Kaufman, 1996. "Bank Failures, Systemic Risk, and Bank Regulation," Cato Journal, Cato Journal, Cato Institute, vol. 16(1), pages 17-45, Spring/Su.
    17. Flannery, Mark J, 1994. "Debt Maturity and the Deadweight Cost of Leverage: Optimally Financing Banking Firms," American Economic Review, American Economic Association, vol. 84(1), pages 320-331, March.
    18. R. Alton Gilbert, 1990. "Market discipline of bank risk: theory and evidence," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-18.
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    Cited by:

    1. 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.
    2. Waggoner, Daniel F. & Zha, Tao, 2003. "Likelihood preserving normalization in multiple equation models," Journal of Econometrics, Elsevier, vol. 114(2), pages 329-347, June.
    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.

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