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The IS curve and the transmission of monetary policy: is there a puzzle?

  • Charles Goodhart
  • Boris Hofmann

In this paper, the performance of the New Keynesian IS curve for the G7 countries is assessed. It is found that there is an IS puzzle for both the purely backward-looking as well as for the forward-looking IS curve. The real interest rate does not have a significantly negative effect on the output gap. Based on an extended specification of the IS curve, also including asset prices and monetary aggregates, a significantly negative interest rate effect on aggregate demand is found for all countries. This finding suggests that a richer specification of the IS curve in empirical work may be necessary in order to obtain an unbiased estimate of the effect of monetary policy on aggregate demand.

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Article provided by Taylor & Francis Journals in its journal Applied Economics.

Volume (Year): 37 (2005)
Issue (Month): 1 ()
Pages: 29-36

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Handle: RePEc:taf:applec:v:37:y:2005:i:1:p:29-36
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