IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

What Explains the Varying Monetary Response to Technology SHocks in G7-Countries

  • Athena T. Theodorou
  • Neville R. Francis
  • Michael T. Owyang

Structural vector autoregressions (SVARs) have become a standard tool used to determine the roles of monetary policy shocks in generating cyclical fluctuations in the United States. Using both long- and short-run identifying restrictions, various authors have explored the empirical response of the economy to exogenous monetary innovations. While the majority of the studies of monetary policy have focused on the effect of exogenous money growth or interest rate shocks, recent research has begun to investigate the effect of endogenous monetary policy -- that is, the central bank's reaction to non-monetary shocks. One exogenous shock that many economists believe contributes to the business cycle fluctuations that feed into the Taylor rule is the technology shock. In an effort to identify the empirical effects of technology shocks, Gali (1999) estimated two models: a bivariate model of productivity and hours and a five-variable model adding money, inflation, and interest rates. His identification estimates a decomposition of productivity and hours into innovations to technology and non-technology components by assuming that only the former can have long-run effects on labor productivity. Empirical identification of the technology shock was a key first step in developing a unified reduced-form framework with which to examine the role that monetary policy has played in smoothing economic fluctuations. Along these lines, Gali, Lopez-Salido, and Valles (2003 -- henceforth GLV) examined the endogenous response of monetary policy to identified technology shocks in the United States. GLV examine a four-variable structural VAR for the United States with labor productivity, labor hours, the real interest rate, and inflation. Using the Gali (1999) identification, they find that during the Volcker-Greenspan (VG) era the Fed's response to the technology shock is to raise the nominal interest rate, while during the Martin-Burns-Miller (MBM) era the Fed lowers the nominal rate. Moreover, they find that the inflation and hours responses in the two periods differ in sign. Our goal is to expand the scope of GLV to an international context to determine whether the effect of technology shocks is consistent across the major industrialized countries. In particular, we are interested in how the different central banks respond to technology shocks. We investigate the possibility that technology shocks in different countries produce fundamentally different inflation and employment responses and to what extent those effects alter the monetary response. Using a theoretical model adapted from King and Wolman (1996), we find that the empirical responses can be matched with theoretical responses. Differences in these theoretical responses can be attributed to alternative policy rules and changes in the cost of capital adjustment. Further tests verify that these country characteristics could, indeed, have some explanatory power. Our results are by no means conclusive; however, they do suggest a number of theoretically consistent similarities across countries in each subgroup. While we believe more investigation into these cross-country comparisons is warranted, the initial indication is that the manner in which monetary policy is conducted and the degree of rigidity in capital markets may be determining factors in a country's response to technology shocks. Gali, Jordi (1999). "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?" American Economic Review, March 1999, 89(1), pp. 249-271. Gali, Jordi; Lopez-Salido, J. David; and Valles, Javier (2003). "Technology Shocks and Monetary Policy: Assessing the Fed's Performance." Journal of Monetary Economics, May 2003, 50(4), pp. 723-743. King, Robert G., and Wolman, Alexander L. (1996). "Inflation Targetting in a St. Louis Model of the 21st Century." Federal Reserve Bank of St. Louis Review, May/June 1996, 78(3), pp. 83-107.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://repec.org/esNASM04/up.32568.1075506786.pdf
Download Restriction: no

Paper provided by Econometric Society in its series Econometric Society 2004 North American Summer Meetings with number 444.

as
in new window

Length:
Date of creation: 11 Aug 2004
Date of revision:
Handle: RePEc:ecm:nasm04:444
Contact details of provider: Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
Email:


More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Neville Francis & Valerie A. Ramey, 2004. "The Source of Historical Economic Fluctuations: An Analysis using Long-Run Restrictions," NBER Working Papers 10631, National Bureau of Economic Research, Inc.
  2. Smets, Frank & Wouters, Rafael, 2004. "Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 4750, C.E.P.R. Discussion Papers.
  3. Jordi Gali & J. David Lopez-Salido & Javier Valles, 2002. "Technology Shocks and Monetary Policy: Assessing the Fed's Performance," NBER Working Papers 8768, National Bureau of Economic Research, Inc.
  4. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring Monetary Policy," NBER Working Papers 5145, National Bureau of Economic Research, Inc.
  5. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  6. Caballero, R.J. & Hammour, M.L., 1991. "The Cleansing Effect of Recessions," Discussion Papers 1991_59, Columbia University, Department of Economics.
  7. Francis, Neville & Ramey, Valerie A., 2005. "Is the technology-driven real business cycle hypothesis dead? Shocks and aggregate fluctuations revisited," Journal of Monetary Economics, Elsevier, vol. 52(8), pages 1379-1399, November.
  8. Frederic S. Mishkin & Adam S. Posen, 1997. "Inflation targeting: lessons from four countries," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 9-110.
  9. Nelson, Edward & Nikolov, Kalin, 2004. "Monetary Policy and Stagflation in the UK," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(3), pages 293-318, June.
  10. Susanto Basu & John Fernald & Miles Kimball, 2004. "Are technology improvements contractionary?," Working Paper Series WP-04-20, Federal Reserve Bank of Chicago.
  11. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  12. Harald Uhlig, 2004. "Do Technology Shocks Lead to a Fall in Total Hours Worked?," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 361-371, 04/05.
  13. Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 83-107.
  14. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1998. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," CEPR Discussion Papers 1908, C.E.P.R. Discussion Papers.
  15. Uhlig, H.F.H.V.S., 1999. "What are the Effects of Monetary Policy on Output? Results from an Agnostic Identification Procedure," Discussion Paper 1999-28, Tilburg University, Center for Economic Research.
  16. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
  17. Jean Boivin & Marc Giannoni, 2002. "Has monetary policy become less powerful?," Staff Reports 144, Federal Reserve Bank of New York.
  18. repec:dgr:kubcen:199928 is not listed on IDEAS
  19. Galí, Jordi, 1996. "Technology, Employment, and the Business Cycle: Do Technology Shocks Explain Aggregate Fluctuations?," CEPR Discussion Papers 1499, C.E.P.R. Discussion Papers.
  20. Neville Francis & Michael T. Owyang & Athena T. Theodorou, 2003. "The use of long-run restrictions for the identification of technology shocks," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 53-66.
  21. King, Robert G & Watson, Mark W, 1998. "The Solution of Singular Linear Difference Systems under Rational Expectations," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 1015-26, November.
  22. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
  23. Lawrence J. Christiano & Michele Boldrin & Jonas D. M. Fisher, 2001. "Habit Persistence, Asset Returns, and the Business Cycle," American Economic Review, American Economic Association, vol. 91(1), pages 149-166, March.
  24. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  25. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers 768, Board of Governors of the Federal Reserve System (U.S.).
  26. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, October.
  27. 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.
  28. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  29. Taylor, John B, 1993. "The Use of the New Macroeconometrics for Policy Formulation," American Economic Review, American Economic Association, vol. 83(2), pages 300-305, May.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:ecm:nasm04:444. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.