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The Impact of Monetary Targeting in the United States: 1976-1984

  • Carl E. Walsh

This paper attempts to assess empirically the impact on output and inflation of monetary policy in the U-S. during the period of M1 targeting from 1976 to 1984. The impact of policy shocks on output and inflation, and the impact of aggregate demand, aggregate supply and money demand shocks on M1 and the Fed's target path, are examined through the use of impulse response functions. These response functions are based on an orthogonalization of VAR residuals derived from an estimated structural model. The VAR specification reflects the finding that M1 and the Fed's target for M1 are cointegrated. The evidence suggests that money supply shocks and shocks to M1 target have accounted for little of the observed volatility of output or inflation. However, the induced policy response to aggregate demand and supply shocks has contributed to subsequent inflation.

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File URL: http://www.nber.org/papers/w2384.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 2384.

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Date of creation: Sep 1987
Date of revision:
Publication status: published as Walsh, Carl E. "Monetary Targeting And Inflation: 1976-1984." FRB San Francisco - Economic Review (Winter 1987): 5-16.
Handle: RePEc:nbr:nberwo:2384
Note: ME
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  1. Marvin Goodfriend, 1986. "Interest rate smoothing and price level trend-stationarity," Working Paper 86-04, Federal Reserve Bank of Richmond.
  2. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
  3. V. Vance Roley & Carl E. Walsh, 1983. "Monetary Policy Regimes, Expected Inflation, and the Response of Interest Rates to Money Announcements," NBER Working Papers 1181, National Bureau of Economic Research, Inc.
  4. Bennett T. McCallum, 1984. "Credibility and monetary policy," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 105-135.
  5. Nelson, Charles R. & Plosser, Charles I., 1982. "Trends and random walks in macroeconmic time series : Some evidence and implications," Journal of Monetary Economics, Elsevier, vol. 10(2), pages 139-162.
  6. Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
  7. William Poole, 1976. "Interpreting the Fed's Monetary Targets," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 7(1), pages 247-260.
  8. Olivier J. Blanchard, 1986. "Empirical Structural Evidence on Wages, Prices and Employment in the US," NBER Working Papers 2044, National Bureau of Economic Research, Inc.
  9. John Y. Campbell & Robert J. Shiller, 1986. "Cointegration and Tests of Present Value Models," Cowles Foundation Discussion Papers 785, Cowles Foundation for Research in Economics, Yale University.
  10. Bennett T. McCallum, 1985. "On Consequences and Criticisms of Monetary Targeting," NBER Working Papers 1596, National Bureau of Economic Research, Inc.
  11. Robert J. Barro, 1988. "Interest-Rate Smoothing," NBER Working Papers 2581, National Bureau of Economic Research, Inc.
  12. Walsh, Carl E, 1986. "In Defense of Base Drift," American Economic Review, American Economic Association, vol. 76(4), pages 692-700, September.
  13. Friedman, Milton, 1982. "Monetary Policy: Theory and Practice," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 14(1), pages 98-118, February.
  14. Gould, J. P. & Miller, M. H. & Nelson, C. R. & Upton, C. W., 1978. "The stochastic properties of velocity and the quantity theory of money," Journal of Monetary Economics, Elsevier, vol. 4(2), pages 229-248, April.
  15. Olivier J. Blanchard & Mark W. Watson, 1984. "Are Business Cycles All Alike?," NBER Working Papers 1392, National Bureau of Economic Research, Inc.
  16. Taylor, John B, 1979. "Staggered Wage Setting in a Macro Model," American Economic Review, American Economic Association, vol. 69(2), pages 108-13, May.
  17. Engle, Robert F & Granger, Clive W J, 1987. "Co-integration and Error Correction: Representation, Estimation, and Testing," Econometrica, Econometric Society, vol. 55(2), pages 251-76, March.
  18. Dickey, David A & Fuller, Wayne A, 1981. "Likelihood Ratio Statistics for Autoregressive Time Series with a Unit Root," Econometrica, Econometric Society, vol. 49(4), pages 1057-72, June.
  19. Carl E. Walsh, 1987. "Testing for Real Effects of Monetary Policy Regime Shifts," NBER Working Papers 2116, National Bureau of Economic Research, Inc.
  20. Meltzer, A.H. & Heinemann, H.E. & Jordan, J.L. & Levy, M.D. & Plosser, C.I. & Poole, W. & Rasche, R.H. & Schwartz, A.J., 1991. "Shadow Open Market Committee; Policy Statement and Position Papers," Papers ip_91-01, Rochester, Business - Industry Policy Studies.
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