Are the Effects of Monetary Policy Shocks Big or Small?

Abstract:     
This paper studies the estimated effects of monetary policy shocks from standard VAR’s, which are small, and those from the approach of Romer and Romer (2004), which are large. The differences appear to be driven by three factors: a) the contractionary impetus associated with each shock, b) the period of non-borrowed reserves targeting and c) lag length selection. Accounting for these factors, the real effects of monetary policy shocks are consistent across approaches and are most likely medium: a one-hundred basis point innovation to the Federal Funds Rate lowers production by 2-3% and raises the unemployment rate by approximately 0.50% points. In addition, alternative measures of monetary policy shocks from estimated Taylor rules also yield medium-sized real effects and indicate that the historical contribution of monetary policy shocks to real fluctuations has been non-trivial, particularly during the 1970s.

Number of Pages in PDF File: 49

Keywords: Monetary Policy, Shocks, Taylor rule

JEL Classification: E3, E5

working papers series