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The Lags of Monetary Policy

Author

Listed:
  • David Gruen

    (Reserve Bank of Australia)

  • John Romalis

    (Reserve Bank of Australia)

  • Naveen Chandra

    (Reserve Bank of Australia)

Abstract

The length of the transmission lags from monetary policy to output has been the subject of much research over the years, but there are serious problems in isolating the lags with any precision. This paper uses a simple model of Australian output to estimate the length of the lags, and then examines how attempts to grapple with the estimation problems might change the results. We estimate that output growth falls by about one-third of one per cent in both the first and second years after a one percentage point rise in the short-term real interest rate, and by about one-sixth of one per cent in the third year. This implies an average lag of about five or six quarters in monetary policy’s impact on output growth. Each of these estimates is, however, subject to considerable uncertainty. We discuss the implications for policy of these relatively long and uncertain lags. Finally, we find no evidence that the average lag from monetary policy to output growth has become any shorter in the 1990s.

Suggested Citation

  • David Gruen & John Romalis & Naveen Chandra, 1997. "The Lags of Monetary Policy," RBA Research Discussion Papers rdp9702, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp9702
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    File URL: http://www.rba.gov.au/publications/rdp/1997/pdf/rdp9702.pdf
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    References listed on IDEAS

    as
    1. Martin Eichenbaum & Charles L. Evans, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, Oxford University Press, vol. 110(4), pages 975-1009.
    2. Pesaran, M. H. & Shin, Y. & Smith, R. J., 1996. "Testing for the 'Existence of a Long-run Relationship'," Cambridge Working Papers in Economics 9622, Faculty of Economics, University of Cambridge.
    3. Matthew D. Shapiro, 1986. "The Dynamic Demand for Capital and Labor," The Quarterly Journal of Economics, Oxford University Press, vol. 101(3), pages 513-542.
    4. Tro Kortian & James O’Regan, 1996. "Australian Financial Market Volatility: An Exploration of Cross-country and Cross-market Linkages," RBA Research Discussion Papers rdp9609, Reserve Bank of Australia.
    5. Stephen Grenville, 1996. "Recent Developments in Monetary Policy: Australia and Abroad," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 29(1), pages 29-39.
    6. Gordon de Brouwer & John Romalis, 1996. "External Influences on Output: An Industry Analysis," RBA Research Discussion Papers rdp9612, Reserve Bank of Australia.
    7. Glenn D. Rudebusch, 1995. "What are the lags in monetary policy?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue feb3.
    8. repec:crs:wpaper:9645 is not listed on IDEAS
    9. David Gruen & Geoffrey Shuetrim, 1994. "Internationalisation and the Macroeconomy," RBA Annual Conference Volume,in: Philip Lowe & Jacqueline Dwyer (ed.), International Intergration of the Australian Economy Reserve Bank of Australia.
    10. Philip Lowe, 1995. "The Link between the Cash Rate and Market Interest Rates," RBA Research Discussion Papers rdp9504, Reserve Bank of Australia.
    11. Nicolas de Roos & Bill Russell, 1996. "Towards an Understanding of Australia’s Co-movement with Foreign Business Cycles," RBA Research Discussion Papers rdp9607, Reserve Bank of Australia.
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    Citations

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    Cited by:

    1. Ellis W. Tallman & Naveen Chandra, 1997. "Financial aggregates as conditioning information for Australian output and inflation," FRB Atlanta Working Paper 97-8, Federal Reserve Bank of Atlanta.
    2. Daniel Buncic & Martin Melecky, 2008. "An Estimated New Keynesian Policy Model for Australia," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 1-16, March.
    3. Gordon de Brouwer, 1999. "Deregulation and Open Capital Markets: The Australian Experience Before Wallis," Agenda - A Journal of Policy Analysis and Reform, Australian National University, College of Business and Economics, School of Economics, vol. 6(1), pages 51-68.
    4. Tony McDonald & Steven Morling, 2011. "The Australian economy and the global downturn, Part 1: Reasons for resilience," Economic Roundup, The Treasury, Australian Government, issue 2, pages 1-31, September.
    5. By Alexander W. Hoffmaister, 2001. "Inflation Targeting in Korea: An Empirical Exploration," IMF Staff Papers, Palgrave Macmillan, vol. 48(2), pages 1-5.
    6. Francisco G. Dakila, Jr. & Ma. Digna G. Paraso, 2005. "Monetary transmission mechanism in the Philippines : the interest rate channel," Philippine Review of Economics, University of the Philippines School of Economics and Philippine Economic Society, vol. 42(1), pages 55-80, June.
    7. Paul Conway, 1998. "Macroeconomic variability in New Zealand: An SVAR study," New Zealand Economic Papers, Taylor & Francis Journals, vol. 32(2), pages 161-186.
    8. West, L.k. & Agbola, W.F., 2005. "Causality Links Between Asset Prices And Cash Rate In Australia," International Journal of Applied Econometrics and Quantitative Studies, Euro-American Association of Economic Development, vol. 2(3), pages 69-86.
    9. Yuong Ha, 2000. "Uncertainty about the length of the monetary policy transmission lag: implications for monetary policy," Reserve Bank of New Zealand Discussion Paper Series DP2000/01, Reserve Bank of New Zealand.
    10. Jakub Fischer & Hana Lipovská & Daniel Němec, 2016. "Implementační zpoždění diskreční fiskální politiky
      [Implementation Lag of Discretionary Fiscal Policy]
      ," Politická ekonomie, University of Economics, Prague, vol. 2016(3), pages 245-263.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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