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Total Factor Productivity and Monetary Policy: Evidence from Conditional Volatility

  • Nicholas Apergis

    (University of Macedonia)

  • Stephen M. Miller

    (University of Connecticut and University of Nevada, Las Vegas)

This paper empirically assesses whether monetary policy affects real economic activity through its affect on the aggregate supply side of the macroeconomy. Analysts typically argue that monetary policy either does not affect the real economy, the classical dichotomy, or only affects the real economy in the short run through aggregate demand %G–%@ new Keynesian or new classical theories. Real business cycle theorists try to explain the business cycle with supply-side productivity shocks. We provide some preliminary evidence about how monetary policy affects the aggregate supply side of the macroeconomy through its affect on total factor productivity, an important measure of supply-side performance. The results show that monetary policy exerts a positive and statistically significant effect on the supply-side of the macroeconomy. Moreover, the findings buttress the importance of countercyclical monetary policy as well as support the adoption of an optimal money supply rule. Our results also prove consistent with the effective role of monetary policy in the Great Moderation as well as the more recent rise in productivity growth.

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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2007-06.

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Length: 31 pages
Date of creation: Mar 2007
Date of revision:
Publication status: Published in International Finance, Summer 2007
Handle: RePEc:uct:uconnp:2007-06
Note: The authors express their gratitude to Parantap Basu, three anonymous referees of this journal and the Editor of International Finance for their valuable comments and suggestions on an earlier draft of this paper. Needless to say, the usual disclaimer applies.
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