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http://ssrn.com/abstract=1586686
 
 

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How Has the Monetary Transmission Mechanism Evolved Over Time?


Jean Boivin


HEC Montreal; Columbia Business School; National Bureau of Economic Research (NBER)

Michael T. Kiley


Board of Governors of the Federal Reserve - Macroeconomic and Quantitative Studies Section

Frederic S. Mishkin


Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

April 2010

NBER Working Paper No. w15879

Abstract:     
We discuss the evolution in macroeconomic thought on the monetary policy transmission mechanism and present related empirical evidence. The core channels of policy transmission – the neoclassical links between short-term policy interest rates, other asset prices such as long-term interest rates, equity prices, and the exchange rate, and the consequent effects on household and business demand – have remained steady from early policy-oriented models (like the Penn-MIT-SSRC MPS model) to modern dynamic-stochastic-general-equilibrium (DSGE) models. In contrast, non-neoclassical channels, such as credit-based channels, have remained outside the core models. In conjunction with this evolution in theory and modeling, there have been notable changes in policy behavior (with policy more focused on price stability) and in the reduced form correlations of policy interest rates with activity in the United States. Regulatory effects on credit provision have also changed significantly. As a result, we review the empirical evidence on the changes in the effect of monetary policy actions on real activity and inflation and present new evidence, using both a relatively unrestricted factor-augmented vector autoregression (FAVAR) and a DSGE model. Both approaches yield similar results: Monetary policy innovations have a more muted effect on real activity and inflation in recent decades as compared to the effects before 1980. Our analysis suggests that these shifts are accounted for by changes in policy behavior and the effect of these changes on expectations, leaving little role for changes in underlying private-sector behavior (outside shifts related to monetary policy changes).

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Date posted: April 12, 2010  

Suggested Citation

Boivin, Jean and Kiley, Michael T. and Mishkin, Frederic S., How Has the Monetary Transmission Mechanism Evolved Over Time? (April 2010). NBER Working Paper No. w15879. Available at SSRN: http://ssrn.com/abstract=1586686

Contact Information

Jean Boivin (Contact Author)
HEC Montreal ( email )
3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada
Columbia Business School ( email )
3022 Broadway
Department of Economics and Finance Room 719, Uris Hall
New York, NY 10027
United States
212-854-9091 (Phone)
212-316-9355 (Fax)
HOME PAGE: http://www.columbia.edu/~jb903/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Michael T. Kiley
Board of Governors of the Federal Reserve - Macroeconomic and Quantitative Studies Section ( email )
20th and C Streets, NW
Washington, DC 20551
United States
202-452-2448 (Phone)
202-452-5296 (Fax)
Frederic S. Mishkin
Columbia Business School - Finance and Economics ( email )
3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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References:  100
Citations:  17
Footnotes:  24

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