Discussion paper

DP1219 The Monetary Transmission Mechanism: Evidence from the G-7 Countries

In this paper we compare the effects of monetary policy on output and prices in the G-7 countries using a parsimonious macroeconometric model comprising output, prices and a short-term interest rate. We identify monetary policy shocks by assuming that they do not affect real output instantaneously (within the quarter) or in the long run, and implement these restrictions using a sequential instrumental variables technique. We show that the so-called price-puzzle, which has been noticed in the large VAR-literature in which only short-run restrictions are used, disappears. This suggests that the puzzle is due to the fact that the use of only short-run identifying restrictions does not properly discriminate between contractionary aggregate supply shocks and monetary policy shocks. We conclude that the effects of a standardized monetary policy action are very similar across countries.


Gerlach, S and F Smets (eds) (1995), “DP1219 The Monetary Transmission Mechanism: Evidence from the G-7 Countries”, CEPR Press Discussion Paper No. 1219. https://cepr.org/publications/dp1219