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Identification and the Liquidity Effect of a Monetary Policy Shock

52 Pages Posted: 26 May 2004 Last revised: 28 Dec 2011

Lawrence J. Christiano

Northwestern University; Federal Reserve Bank of Cleveland; Federal Reserve Bank of Chicago; Federal Reserve Bank of Minneapolis; National Bureau of Economic Research (NBER)

Martin Eichenbaum

Northwestern University; National Bureau of Economic Research (NBER)

Date Written: November 1991

Abstract

Conventional wisdom holds that unanticipated expansionary monetary policy shocks cause transient but persistent decreases in real and nominal interest rates. However a number of econometric studies argue that the evidence favors the opposite view, namely that these shocks actually raise, rather than lower, short term interest rates. We show that this conclusion is not robust to the measure of monetary aggregate used or to the assumptions made to identify monetary policy disturbances. For example, when our analysis is done using non borrowed reserves, we find strong evidence in favor of the conventional view. Existing challenges to the conventional view lack credibility not just because of their fragility. They are based upon measures of policy disturbances which generate seemingly implausible implications about things other than interest rates.

Suggested Citation

Christiano, Lawrence J. and Eichenbaum, Martin, Identification and the Liquidity Effect of a Monetary Policy Shock (November 1991). NBER Working Paper No. w3920. Available at SSRN: https://ssrn.com/abstract=300162

Lawrence J. Christiano (Contact Author)

Northwestern University ( email )

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Federal Reserve Bank of Cleveland

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Federal Reserve Bank of Chicago

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Federal Reserve Bank of Minneapolis

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National Bureau of Economic Research (NBER)

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Martin Eichenbaum

Northwestern University ( email )

2003 Sheridan Road
Evanston, IL 60208
United States
847-491-8232 (Phone)
847-491-7001 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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