What are the Effects of Monetary Policy on Output? : Results from an Agnostic Identification Procedure

Tilburg University, CentER Working Paper No. 1999-28

Posted: 18 Feb 2000

See all articles by Harald Uhlig

Harald Uhlig

University of Chicago - Department of Economics

Date Written: 1999

Abstract

This paper proposes to estimate the effects of monetary policy shocks by a new "agnostic" method, imposing sign restrictions on the impulse responses of prices, nonborrowed reserves and the federal funds rate in response to a monetary policy shock. No restrictions are imposed on the response of real GDP to answer the key question in the title. We find that "contractionary" monetary policy shocks have an ambiguous effect on real GDP. Otherwise, the results found in the empirical VAR literature so far are largely confirmed. The results could be paraphrased as a new Keynesian-new classical synthesis: even though the general price level is sticky for a period of about a year, money may well be close to neutral. We provide a counterfactual analysis of the early 80's, setting the monetary policy shocks to zero after December 1979, and recalculating the data. We found that the differences between observed real GDP and counterfactually calculated real GDP was not very large. Thus, the label "Volcker-recession" for the two recessions in the early 80's appears to be misplaced.

JEL Classification: E52, C51

Suggested Citation

Uhlig, Harald, What are the Effects of Monetary Policy on Output? : Results from an Agnostic Identification Procedure (1999). Tilburg University, CentER Working Paper No. 1999-28, Available at SSRN: https://ssrn.com/abstract=199742

Harald Uhlig (Contact Author)

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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