Working Paper: NBER ID: w26666
Authors: Oscar Jord; Sanjay R. Singh; Alan M. Taylor
Abstract: Does monetary policy have persistent effects on the productive capacity of the economy? Yes, we find that such effects are economically and statistically significant and last for over a decade based on: (1) identification of exogenous monetary policy fluctuations using the trilemma of international finance; (2) merged data from two new international historical cross-country databases reaching back to the nineteenth century; and (3) econometric methods robust to long-horizon inconsistent estimates. Notably, the capital stock and total factor productivity (TFP) exhibit strong hysteresis, whereas labor does not; and money is non-neutral for a much longer period of time than is customarily assumed. We show that a New Keynesian model with endogenous TFP growth can reconcile these empirical findings.
Keywords: Monetary Policy; Long-Run Effects; Productive Capacity; Total Factor Productivity; Hysteresis
JEL Codes: E01; E30; E32; E44; E47; E51; F33; F42; F44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy shock (E39) | output (C67) |
| monetary policy shock (E39) | total factor productivity (TFP) (D24) |
| monetary policy shock (E39) | capital stock (E22) |
| monetary policy shock (E39) | labor (J89) |
| monetary policy shock (E39) | hysteresis in capital stock (E22) |
| monetary policy shock (E39) | hysteresis in total factor productivity (TFP) (D24) |