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Does Anticipated Monetary Policy Matter? An Econometric Investigation

  • Frederic S. Mishkin

Recent theorizing with business cycle models which incorporate features of the Friedman-Phelps natural rate model along with rational expectations lead to the following policy conclusions. Anticipated changes in aggregate demand policy will have already been taken into account in economic agents behavior and will thus evoke no further output or employment response. Therefore, deterministic feedback policy rules will have no impact on output fluctuations in the economy. These policy implications of what Modigliani has dubbed the Macro Rational Expectations (MRE) hypothesis are of such importance that a wide range of empirical research is needed for its verification or refutation. Recent empirical work has tested the "neutrality" implication of the MRE hypothesis that anticipated monetary policy does not affect output or unemployment. Although this empirical work has frequently been favorable to the MRE hypothesis, it suffers from several deficiencies that create suspicion about the robustness of the results. This paper is an attempt to conduct an econometric investigation of the implications of the MRE hypothesis which does not suffer from these deficiencies. The results here strongly reject the neutrality implications of the MRE hypothesis: unanticipated movements in monetary policy are not found to have a larger impact on output and unemployment than anticipated movements. This evidence casts doubt on previous evidence that is cited as supporting the view that only unanticipated monetary policy is relevant to the business cycle.

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File URL: http://www.nber.org/papers/w0506.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 0506.

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Date of creation: Jul 1980
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Publication status: published as Mishkin, Frederic S. "Does Anticipated Monetary Policy Matter? An Econometric Investigation." Journal of Political Economy, Vol. 90, No. 1, 1982), pp. 22-51.
Handle: RePEc:nbr:nberwo:0506
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  1. Plosser, Charles I. & Schwert*, G. William, 1978. "Money, income, and sunspots: Measuring economic relationships and the effects of differencing," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 637-660, November.
  2. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  3. Milton Friedman, 1959. "The Demand for Money: Some Theoretical and Empirical Results," NBER Chapters, in: The Demand for Money: Some Theoretical and Empirical Results, pages 1-29 National Bureau of Economic Research, Inc.
  4. Small, David H, 1979. "Unanticipated Money Growth and Unemployment in the United States: Comment," American Economic Review, American Economic Association, vol. 69(5), pages 996-1003, December.
  5. Phelps, Edmund S & Taylor, John B, 1977. "Stabilizing Powers of Monetary Policy under Rational Expectations," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 163-90, February.
  6. Granger, C W J, 1969. "Investigating Causal Relations by Econometric Models and Cross-Spectral Methods," Econometrica, Econometric Society, vol. 37(3), pages 424-38, July.
  7. Sargent, Thomas J, 1976. "A Classical Macroeconometric Model for the United States," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 207-37, April.
  8. Durbin, J, 1970. "Testing for Serial Correlation in Least-Squares Regression When Some of the Regressors are Lagged Dependent Variables," Econometrica, Econometric Society, vol. 38(3), pages 410-21, May.
  9. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  10. Frederic S. Mishkin, 1978. "Efficient-Markets Theory: Implications for Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 9(3), pages 707-752.
  11. Fischer, Stanley, 1977. "Long-Term Contracts, Rational Expectations, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 85(1), pages 191-205, February.
  12. Sargent, Thomas J & Wallace, Neil, 1975. ""Rational" Expectations, the Optimal Monetary Instrument, and the Optimal Money Supply Rule," Journal of Political Economy, University of Chicago Press, vol. 83(2), pages 241-54, April.
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