A Market-Based Test of the Effect of Monetary Policy

Maurice Levi and Alan C Shapiro

Economic Inquiry, 1987, vol. 25, issue 2, 341-49

Abstract: This paper tests the rational expectations-natural rate hypothesis withou t basing expectations on time series estimates. Instead, market-based data are used. Unexpected money supply changes are determined via th e Fisher Effect and the Quantity Equation. This introduces errors of a very different kind than the traditional approach, and yet the resu lts are remarkably similar to those generated using time series estim ates. Unanticipated money shocks are shown to exert a significant but only short-run effect on a real output, suggesting only a short-run Phillips curve trade-off. Anticipated money growth appears to have no affect on real output. Copyright 1987 by Oxford University Press.

Date: 1987
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