For they know not what they do: an analysis of monetary policy during the Great Moderation

Makram El-Shagi and Logan Kelly

Applied Economics Letters, 2017, vol. 24, issue 10, 717-721

Abstract: In this article, we develop an empirical framework to show the importance of money during the Great Moderation, while accounting for the fact that monetary policy was exclusively conducted through interest rates. We estimate the impulse response functions and forecast error variance decomposition derived from a structural VAR with a least absolute shrinkage and selection operator–based lag selection. The variance decomposition suggests that a substantial component of macroeconomic variation has been driven by shocks to the money market, which were not only unintended by the Federal Reserve, but worse passed unnoticed allowing those shocks to accumulate over time.

Date: 2017
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DOI: 10.1080/13504851.2016.1223812

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