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The monetary transmission mechanism: an empirical framework

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  • John B. Taylor

Abstract

This paper describes an empirical framework for analyzing the monetary transmission mechanism through which changes in monetary policy affect real GDP and inflation. The framework reflects the work of a large number of empirical researchers who have built econometric models of the impacts of monetary policy on real interest rates and real exchange rates. The framework is international in its scope and emphasizes the prices of financial assets rather than the quantities of these assets. In most cases expectations are assumed to be rational and the prices of goods and services are temporarily rigid. The paper concludes with a comparison of this empirical framework with a theoretical framework proposed by Milton Friedman 25 years ago.

Suggested Citation

  • John B. Taylor, 1995. "The monetary transmission mechanism: an empirical framework," Working Papers in Applied Economic Theory 95-07, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfap:95-07
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    References listed on IDEAS

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    1. Christina D. Romer & David H. Romer, 1994. "What Ends Recessions?," NBER Chapters, in: NBER Macroeconomics Annual 1994, Volume 9, pages 13-80, National Bureau of Economic Research, Inc.
    2. Milton Friedman, 1971. "A Theoretical Framework for Monetary Analysis," NBER Books, National Bureau of Economic Research, Inc, number frie71-1.
    3. McCallum, Bennett T., 1994. "A reconsideration of the uncovered interest parity relationship," Journal of Monetary Economics, Elsevier, vol. 33(1), pages 105-132, February.
    4. Bruce C. Greenwald & Joseph E. Stiglitz, 1993. "Monetary policy and the theory of the risk-averse bank," Proceedings, Federal Reserve Bank of San Francisco, issue Mar.
    5. Bernanke, Ben S., 1986. "Alternative explanations of the money-income correlation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 49-99, January.
    6. Flint Brayton & Jaime R. Marquez, 1990. "The behavior of monetary sectors and monetary policy: evidence from multicountry models," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 365-398.
    7. King, Robert G & Watson, Mark W, 1996. "Money, Prices, Interest Rates and the Business Cycle," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 35-53, February.
    8. Bennett T. McCallum, 1993. "Specification and Analysis of a Monetary Policy Rule for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 11(2), pages 1-45, December.
    9. Friedman, Milton, 1972. "Comments on the Critics," Journal of Political Economy, University of Chicago Press, vol. 80(5), pages 906-950, Sept.-Oct.
    10. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-239, March.
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    More about this item

    Keywords

    Monetary policy - United States; Interest rates; Foreign exchange rates;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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