DP14338 The long-run effects of monetary policy

Author(s): Òscar Jordà, Sanjay R. Singh, Alan M. Taylor
Publication Date: January 2020
Date Revised: September 2020
Keyword(s): hysteresis, instrumental vari- ables, local projections, monetary policy, money neutrality, trilemma
JEL(s): E01, E30, E32, E44, E47, E51, F33, F42, F44
Programme Areas: Economic History, International Macroeconomics and Finance, Monetary Economics and Fluctuations, Macroeconomics and Growth
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14338

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.