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The Monetary Transmission Mechanism: Evidence from the G-7 Countries

  • Gerlach, Stefan
  • Smets, Frank

In this paper we compare the effects of monetary policy on output and prices in the G-7 countries using a parsimonious macroeconometric model comprising output, prices and a short-term interest rate. We identify monetary policy shocks by assuming that they do not affect real output instantaneously (within the quarter) or in the long run, and implement these restrictions using a sequential instrumental variables technique. We show that the so-called price-puzzle, which has been noticed in the large VAR-literature in which only short-run restrictions are used, disappears. This suggests that the puzzle is due to the fact that the use of only short-run identifying restrictions does not properly discriminate between contractionary aggregate supply shocks and monetary policy shocks. We conclude that the effects of a standardized monetary policy action are very similar across countries.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1219.

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Date of creation: Jul 1995
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Handle: RePEc:cpr:ceprdp:1219
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  1. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  2. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  3. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  4. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," International Finance Discussion Papers 462, Board of Governors of the Federal Reserve System (U.S.).
  5. Cooley, Thomas F. & Leroy, Stephen F., 1985. "Atheoretical macroeconometrics: A critique," Journal of Monetary Economics, Elsevier, vol. 16(3), pages 283-308, November.
  6. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers 1011, Cowles Foundation for Research in Economics, Yale University.
  7. John M. Roberts, 1990. "The sources of business cycles: a monetarist interpretation," Working Paper Series / Economic Activity Section 108, Board of Governors of the Federal Reserve System (U.S.).
  8. Jordi GalĂ­, 1992. "How Well Does The IS-LM Model Fit Postwar U. S. Data?," The Quarterly Journal of Economics, Oxford University Press, vol. 107(2), pages 709-738.
  9. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  10. Matthew D. Shapiro & Mark W. Watson, 1988. "Sources of Business Cycle Fluctuations," NBER Working Papers 2589, National Bureau of Economic Research, Inc.
  11. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
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