Total Factor Productivity and Monetary Policy: Evidence from Conditional Volatility

22 Pages Posted: 11 Dec 2007

See all articles by Nicholas Apergis

Nicholas Apergis

University of Piraeus; University of Derby

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics; University of Connecticut - Department of Economics

Abstract

This paper empirically assesses whether monetary policy and its volatility affect real economic activity through their effect on the aggregate supply side of the macroeconomy. Analysts typically argue that monetary policy either does not affect the real economy (the classical dichotomy) or only affects the real economy in the short run through aggregate demand (new Keynesian or new classical theories). Real business cycle theorists try to explain the business cycle with supply-side productivity shocks. We provide some preliminary evidence about how monetary policy and its volatility affect the aggregate supply side of the macroeconomy through their effect on total factor productivity and its volatility. Total factor productivity provides an important measure of supply-side performance. The results show that monetary policy and its volatility exert a positive and statistically significant effect on the supply side of the macroeconomy. Moreover, the findings buttress the importance of reducing short-run swings in monetary policy variables as well as support the adoption of an optimal money supply rule. Our results also prove consistent with the effective role of monetary policy during the so-called "Great Moderation" in US gross domestic product volatility beginning in the early 1980s.

Suggested Citation

Apergis, Nicholas and Miller, Stephen M., Total Factor Productivity and Monetary Policy: Evidence from Conditional Volatility. International Finance, Vol. 10, Issue 2, pp. 131-152, Summer 2007. Available at SSRN: https://ssrn.com/abstract=1062009 or http://dx.doi.org/10.1111/j.1468-2362.2007.00200.x

Nicholas Apergis (Contact Author)

University of Piraeus ( email )

Karaoli and Dimitriou 80
80 KARAOLI & DIMITRIOU STREET
Piraeus, Attiki 18534
Greece

University of Derby ( email )

Kedleston Road
Derby, Derbyshire DE22 1GB
United Kingdom

Stephen M. Miller

University of Nevada, Las Vegas - Department of Economics ( email )

4505 S. Maryland Parkway
Box 456005
Las Vegas, NV 89154
United States
702-895-3776 (Phone)
702-895-1354 (Fax)

HOME PAGE: http://faculty.unlv.edu/smiller/

University of Connecticut - Department of Economics

365 Fairfield Way, U-1063
Storrs, CT 06269-1063
United States

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