DP5463 Has Monetary Policy Become More Effective?

Author(s): Jean Boivin, Marc Giannoni
Publication Date: January 2006
Keyword(s): dynamic general equilibrium model, habit formation, indeterminacy, minimum distance estimation, transmission of monetary policy, vector autoregression
JEL(s): C32, E3, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5463

We investigate the implications of changes in the structure of the US economy for monetary policy effectiveness. Estimating a VAR over the pre- and post-1980 periods, we provide evidence of a reduced effect of monetary policy shocks in the latter period. We estimate a structural model that replicates well the economy's response in both periods, and perform counterfactual experiments to determine the source of the change in the monetary transmission mechanism and in the economy's volatility. We find that by responding more strongly to inflation expectations, monetary policy has stabilized the economy more effectively in the post-1980 period.