Shocking the economy from 1967 up to 2023: reinforcing the relevance of Divisia money in US monetary policy

Christophe Barrette and Alain Paquet

Macroeconomic Dynamics, 2025, vol. 29, -

Abstract: Using US quarterly data (1967–2023), including inflation’s post-pandemic surge and decline alongside monetary policies characterized by quantitative easing before refocusing on the 2% target, we utilize traditional and novel econometric tools to assess the stability of key macroeconomic variables’ responses to monetary shocks. Our findings confirm the relevance of a broad Divisia aggregate in understanding monetary policy transmission and highlight its empirical importance in explaining output and price dynamics across decades. Time-varying impulse response functions (IRFs) reveal consistent and puzzle-free price responses to Divisia-based monetary shocks throughout the sample, aligning with theory. Time-varying IRFs indicate that pandemic-related outliers in GDP (2020Q2) do not disrupt results. In contrast, Fed Funds rate or shadow policy interest rate shocks often yield puzzling outcomes across earlier and extended periods.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:cup:macdyn:v:29:y:2025:i::p:-_114

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