Working Paper: NBER ID: w3920
Authors: Lawrence J. Christiano; Martin Eichenbaum
Abstract: Conventional wisdom holds that unanticipated expansionary monetary policy shocks cause transient but persistent decreases in real and nominal interest rates. However a number of econometric studies argue that the evidence favors the opposite view, namely that these shocks actually raise, rather than lower, short term interest rates. We show that this conclusion is not robust to the measure of monetary aggregate used or to the assumptions made to identify monetary policy disturbances. For example, when our analysis is done using non borrowed reserves, we find strong evidence in favor of the conventional view. Existing challenges to the conventional view lack credibility not just because of their fragility. They are based upon measures of policy disturbances which generate seemingly implausible implications about things other than interest rates.
Keywords: Monetary Policy; Liquidity Effects; Interest Rates; Economic Fluctuations
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| unanticipated expansionary monetary policy shocks using non-borrowed reserves (E59) | decrease in short-term interest rates (E43) |
| unanticipated expansionary monetary policy shocks using non-borrowed reserves (E59) | increase in real Gross National Product (GNP) (P44) |
| unanticipated changes in monetary policy (E52) | increase in federal funds rate (E52) |
| unanticipated changes in monetary policy (E52) | significant declines in aggregate output (E23) |
| monetary policy disturbances (E39) | statistical innovations in monetary aggregates (E19) |
| broader aggregates (M1, M2) (E51) | confound various other shocks (E32) |