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The Long-Run Effects of Monetary Policy

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  • Oscar Jorda

    (Federal Reserve Bank of San Francisco an)

  • Alan Taylor

    (University of California, Davis)

  • Sanjay Singh

    (University of California, Davis)

Abstract

A well-worn tenet holds that monetary policy does not affect the long-run productive capacity of the economy. Merging data from two new international historical databases, we find this not to be quite right. Using the trilemma of international finance, we find that exogenous variation in monetary policy affects capital accumulation, and to a lesser extent, total factor productivity, thereby impacting output for a much longer period of time than is customarily assumed. We build a quantitative medium- scale DSGE model with endogenous TFP growth to understand the mechanisms at work. Following a monetary shock, lower output temporarily slows down TFP growth. Internal propagation of the monetary shock extends the slow down in productivity, and eventually lowers trend output. Yet the model replicates conventional textbook results in other dimensions. Monetary policy can have long-run effects.

Suggested Citation

  • Oscar Jorda & Alan Taylor & Sanjay Singh, 2019. "The Long-Run Effects of Monetary Policy," 2019 Meeting Papers 1307, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:1307
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    Cited by:

    1. Garga, Vaishali & Singh, Sanjay R., 2021. "Output hysteresis and optimal monetary policy," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 871-886.
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    3. Mehdi El Herradi & Aurélien Leroy, 2019. "Monetary policy and the top one percent: Evidence from a century of modern economic history," DNB Working Papers 632, Netherlands Central Bank, Research Department.
    4. Christophe Blot & Jérôme Creel & Emmanuelle Faure & Paul Hubert, 2020. "Setting New Priorities for the ECB's Mandate," Sciences Po publications info:hdl:2441/1f03f28hhu8, Sciences Po.
    5. Tervala, Juha, 2021. "Hysteresis and the welfare costs of recessions," Economic Modelling, Elsevier, vol. 95(C), pages 136-144.
    6. Òscar Jordà & Moritz Schularick & Alan M. Taylor, 2020. "Disasters Everywhere: The Costs of Business Cycles Reconsidered," Staff Reports 925, Federal Reserve Bank of New York.
    7. Hauptmeier, Sebastian & Holm-Hadulla, Fédéric & Nikalexi, Katerina, 2020. "Monetary policy and regional inequality," Working Paper Series 2385, European Central Bank.
    8. Tim Willems, 2020. "What Do Monetary Contractions Do? Evidence From Large Tightenings," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 38, pages 41-58, October.
    9. Narayana R. Kocherlakota, 2020. "21st Century Macro," NBER Working Papers 26791, National Bureau of Economic Research, Inc.
    10. Laura Gómez-Acevedo & Marc Hofstetter, 2020. "Disinflations and income distribution," Documentos CEDE 018481, Universidad de los Andes - CEDE.
    11. Òscar Jordà & Alan M. Taylor, 2019. "Riders on the Storm," FRBSF Economic Letter, Federal Reserve Bank of San Francisco.

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    More about this item

    JEL classification:

    • E01 - Macroeconomics and Monetary Economics - - General - - - Measurement and Data on National Income and Product Accounts and Wealth; Environmental Accounts
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E51 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Money Supply; Credit; Money Multipliers
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
    • F44 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Business Cycles

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