Monetary Policy Matters: New Evidence Basedon a New Shock Measure

Christopher Crowe and S. Mahdi Barakchian

No 2010/230, IMF Working Papers from International Monetary Fund

Abstract: Conventional VAR and non-VAR methods of identifying the effects of monetary policy shocks on the economy have found a negative output response to monetary tightening using U.S. data over the 1960s-1990s. However, we show that these methods fail to find this contractionary effect when the sample is restricted to the period since the 1980s, apparently due to changes in the policymaking environment that reduce their effectiveness. Identifying policy shocks using Fed Funds futures data, we recover the contractionary effect of monetary tightening on output and find that almost half of output variation over the period appears due to policy shocks.

Keywords: WP; contractionary monetary policy; monetary policy shock; fed funds rate; price level; Monetary policy; VAR estimation; Fed Funds Futures; FOMC; shock measure; Fed policymaker; reaction function; Fed Funds futures data; Fed Funds futures contracts; Fed Funds Futures market; Vector autoregression; Futures; Central bank policy rate; Structural vector autoregression; Industrial production (search for similar items in EconPapers)
Pages: 65
Date: 2010-10-01
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Citations: View citations in EconPapers (24)

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