Working Paper: NBER ID: w2384
Authors: Carl E. Walsh
Abstract: This paper attempts to assess empirically the impact on output and inflation of monetary policy in the U-S. during the period of M1 targeting from 1976 to 1984. The impact of policy shocks on output and inflation, and the impact of aggregate demand, aggregate supply and money demand shocks on M1 and the Fed's target path, are examined through the use of impulse response functions. These response functions are based on an orthogonalization of VAR residuals derived from an estimated structural model. The VAR specification reflects the finding that M1 and the Fed's target for M1 are cointegrated. The evidence suggests that money supply shocks and shocks to M1 target have accounted for little of the observed volatility of output or inflation. However, the induced policy response to aggregate demand and supply shocks has contributed to subsequent inflation.
Keywords: Monetary Policy; Inflation; Output; Impulse Response Functions
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary supply shocks (E59) | output volatility (E23) |
| monetary supply shocks (E59) | inflation volatility (E31) |
| target path shocks (C69) | output volatility (E23) |
| target path shocks (C69) | inflation volatility (E31) |
| aggregate demand shocks (E00) | higher inflation (E31) |
| positive money supply shocks (E51) | higher rates of inflation (E31) |
| positive target shocks (E65) | lower subsequent rate of inflation (E31) |