Working Paper: CEPR ID: DP5463
Authors: Jean Boivin; Marc Giannoni
Abstract: We investigate the implications of changes in the structure of the US economy for monetary policy effectiveness. Estimating a VAR over the pre- and post-1980 periods, we provide evidence of a reduced effect of monetary policy shocks in the latter period. We estimate a structural model that replicates well the economy's response in both periods, and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy's volatility. We find that by responding more strongly to inflation expectations, monetary policy has stabilized the economy more effectively in the post-1980 period.
Keywords: Dynamic General Equilibrium Model; Habit Formation; Indeterminacy; Minimum Distance Estimation; Transmission of Monetary Policy; Vector Autoregression
JEL Codes: C32; E3; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Increased responsiveness of the Federal Reserve to inflation expectations (E52) | Reduced effect of monetary policy shocks (post-1980) (E65) |
| Current conduct of monetary policy (E52) | Stabilizes inflation in response to supply and demand shocks (E31) |
| Conduct of monetary policy (post-1980) (E52) | Exacerbates output fluctuations in response to supply shocks (E32) |
| Post-1980 policy framework (E65) | Prevents emergence of nonfundamental fluctuations (E32) |