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The Instability in the Monetary Policy Reaction Function and the Estimation of Monetary Policy Shocks

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  • Kishor, N. Kundan
  • Newiak, Monique

Abstract

This paper uses the conventional wisdom about the shift in the monetary policy stance in 1979 to compute monetary policy shocks by estimating different monetary policy reaction functions for the pre-1979 and post-1979 time periods. We use the information from the internal forecasts of the Federal Reserve to derive monetary policy shocks. The results in this paper show that a monetary policy shock in the pre-1979 period affects output and prices much more strongly and quickly than what has been reported in the literature for the full sample. Our findings suggest that the dynamic response of output and prices to a monetary policy shock declined significantly between 1980-2001. We argue that this diminished response to the monetary policy shock is the result of a successful monetary policy that has led to a less volatile economy.

Suggested Citation

  • Kishor, N. Kundan & Newiak, Monique, 2009. "The Instability in the Monetary Policy Reaction Function and the Estimation of Monetary Policy Shocks," MPRA Paper 17643, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:17643
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    Cited by:

    1. F. Zagonari, 2015. "Coherence, efficiency, and independence of the EU environmental policy system: results of complementary statistical and econometric analyses," Working Papers wp992, Dipartimento Scienze Economiche, Universita' di Bologna.

    More about this item

    Keywords

    Monetary Policy Shocks; Greenbook data; Reaction Function;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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