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Monetary Policy Matters: New Evidence Basedon a New Shock Measure

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  • Mr. Christopher W. Crowe
  • Mr. S. Mahdi Barakchian

Abstract

Conventional VAR and non-VAR methods of identifying the effects of monetary policy shocks on the economy have found a negative output response to monetary tightening using U.S. data over the 1960s-1990s. However, we show that these methods fail to find this contractionary effect when the sample is restricted to the period since the 1980s, apparently due to changes in the policymaking environment that reduce their effectiveness. Identifying policy shocks using Fed Funds futures data, we recover the contractionary effect of monetary tightening on output and find that almost half of output variation over the period appears due to policy shocks.

Suggested Citation

  • Mr. Christopher W. Crowe & Mr. S. Mahdi Barakchian, 2010. "Monetary Policy Matters: New Evidence Basedon a New Shock Measure," IMF Working Papers 2010/230, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2010/230
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    Cited by:

    1. Georgiadis, Georgios, 2016. "Determinants of global spillovers from US monetary policy," Journal of International Money and Finance, Elsevier, vol. 67(C), pages 41-61.
    2. Ravn Søren Hove, 2012. "Has the Fed Reacted Asymmetrically to Stock Prices?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 12(1), pages 1-36, June.
    3. repec:spo:wpmain:info:hdl:2441/64veevce0i99oav223j3pkv1hf is not listed on IDEAS
    4. repec:hal:spmain:info:hdl:2441/64veevce0i99oav223j3pkv1hf is not listed on IDEAS
    5. Nandini Sengupta, 2014. "Sectoral Effects of Monetary Policy in India," South Asian Journal of Macroeconomics and Public Finance, , vol. 3(1), pages 127-154, June.
    6. Paul Hubert & Fabien Labondance, 2016. "Central Bank Sentiment and Policy Expectations," Working Papers hal-03459227, HAL.
    7. Kishan Abeygunawardana & Chandranath Amarasekara & C. D. Tilakaratne, 2017. "Macroeconomic Effects of Monetary Policy Shocks," South Asia Economic Journal, Institute of Policy Studies of Sri Lanka, vol. 18(1), pages 21-38, March.
    8. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    9. Nikhil Patel, 2016. "International Trade Finance and the Cost Channel of Monetary Policy in Open Economies," BIS Working Papers 539, Bank for International Settlements.
    10. Eric Monnet, 2014. "Monetary Policy without Interest Rates: Evidence from France's Golden Age (1948 to 1973) Using a Narrative Approach," American Economic Journal: Macroeconomics, American Economic Association, vol. 6(4), pages 137-169, October.
    11. Ruby P. Kishan & Timothy P. Opiela, 2012. "Monetary Policy, Bank Lending, and the Risk‐Pricing Channel," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(4), pages 573-602, June.
    12. Dennis W. Jansen & Ruby P. Kishan & Diego E. Vacaflores, 2013. "Sectoral Effects of Monetary Policy: The Evidence from Publicly Traded Firms," Southern Economic Journal, Southern Economic Association, vol. 79(4), pages 946-970, April.
    13. Becker, Bo & Ivashina, Victoria, 2014. "Cyclicality of credit supply: Firm level evidence," Journal of Monetary Economics, Elsevier, vol. 62(C), pages 76-93.
    14. Dennis W. Jansen & Ruby P. Kishan & Diego E. Vacaflores, 2013. "Sectoral Effects of Monetary Policy: The Evidence from Publicly Traded Firms," Southern Economic Journal, John Wiley & Sons, vol. 79(4), pages 946-970, April.
    15. Angeloni, Ignazio & Faia, Ester & Lo Duca, Marco, 2015. "Monetary policy and risk taking," Journal of Economic Dynamics and Control, Elsevier, vol. 52(C), pages 285-307.
    16. Massa, Massimo & Zhang, Lei, 2015. "Bank Credit Tightening, Debt Market Frictions and Corporate Yield Spreads," CEPR Discussion Papers 10537, C.E.P.R. Discussion Papers.
    17. Laeven, Luc & Tong, Hui, 2012. "US monetary shocks and global stock prices," Journal of Financial Intermediation, Elsevier, vol. 21(3), pages 530-547.
    18. Dennis W. Jansen & Ruby P. Kishan & Diego E. Vacaflores, 2013. "Sectoral Effects of Monetary Policy: The Evidence from Publicly Traded Firms," Southern Economic Journal, John Wiley & Sons, vol. 79(4), pages 946-970, April.
    19. Massa, Massimo & Zhang, Lei, 2021. "Bank credit tightening, debt market frictions, and corporate yield spreads," Journal of Financial Markets, Elsevier, vol. 55(C).
    20. Segev, Nimrod & Schaffer, Matthew, 2020. "Monetary policy, bank competition and regional credit cycles: Evidence from a quasi-natural experiment," Journal of Corporate Finance, Elsevier, vol. 64(C).

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