Shocking the Economy from 1967 up to 2023: Reinforcing the Relevance of Divisia Money in US Monetary Policy

Christophe Barrette and Alain Paquet
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Christophe Barrette: University of Quebec in Montreal
Alain Paquet: University of Quebec in Montreal

No 24-04, Working Papers from Chair in macroeconomics and forecasting, University of Quebec in Montreal's School of Management

Abstract: Using US quarterly data from 1967 to 2023, which includes the surge and subsequent decline in inflation following the pandemic, as well as the significant expansionary monetary policy from quantitative easing preceding a renewed focus on bringing inflation back to the 2% target, we resort to both traditional and new econometric tools to assess the stability of the sign and size of key macroeconomic variables responses to monetary shocks. Our results reinforce and confirm the importance of a broad Divisia measure for understanding monetary policy transmission and making informed policy decisions. In particular, the overall shape of the price responses to a Divisia-based monetary shock is particularly consistent throughout the entire sample. Monetary policy shocks from the fed funds rate or shadow policy interest rate alone fail to produce responses free from empirical puzzles and consistent with expected intuition, for both earlier and extended sample periods. In contrast, Divisia measures generate IRFs that are puzzle-free and align with economic theory and intuition. They are empirically relevant in explaining output and price dynamics from the late 60s to today.

Keywords: Monetary policy shock; Divisia monetary aggregates; SVAR; Time-Varying Parameter Structural VAR; output and price level (search for similar items in EconPapers)
JEL-codes: E3 E31 E32 E5 E51 E52 (search for similar items in EconPapers)
Pages: 75 pages
Date: 2024-09, Revised 2024-09
New Economics Papers: this item is included in nep-cba, nep-his, nep-mac and nep-mon
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