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Title: The long-run effects of monetary policy

Author(s): �scar Jord�, Sanjay R. Singh and Alan M. Taylor

Publication Date: January 2020

Keyword(s): hysteresis, instrumental vari- ables, local projections, monetary policy, money neutrality and trilemma

Programme Area(s): Economic History, International Macroeconomics and Finance, Macroeconomics and Growth and Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Jord�, �, Singh, S and Taylor, A. 2020. 'The long-run effects of monetary policy'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=14338