Monetary Policy and Sectoral Shocks: Did the Fed React Properly to the High-Tech Crisis?

57 Pages Posted: 14 Jul 2003 Last revised: 18 May 2022

See all articles by Claudio E. Raddatz

Claudio E. Raddatz

University of Chile, School of Economics and Business

Roberto Rigobon

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

Date Written: July 2003

Abstract

This paper presents an identification strategy that allows us to study both the sectoral effects of monetary policy and the role that monetary policy plays in the transmission of sectoral shocks. We apply our methodology to the case of the U.S. and find some significant differences in the sectorial responses to monetary policy. We also find that monetary policy is a significant source of sectoral transfers. In particular, a shock to Equipment and Software investment, which we naturally identify with the High-tech crises, induces a response by the monetary authority that generates a temporary boom in Residential Investment and Durable Consumption but has almost no effect on the high-tech sector. Finally, we perform an exercise evaluating what the model predicts regarding the automatic and a more aggressive monetary policy response to a shock similar to the one that hit the U.S. in early 2001. We find that the actual drop in interest rates we have observed is in line with the predictions of the model.

Suggested Citation

Raddatz, Claudio E. and Rigobon, Roberto, Monetary Policy and Sectoral Shocks: Did the Fed React Properly to the High-Tech Crisis? (July 2003). NBER Working Paper No. w9835, Available at SSRN: https://ssrn.com/abstract=423308

Claudio E. Raddatz

University of Chile, School of Economics and Business ( email )

Diagonal Paraguay 257, Of. 1206
Santiago, R. Metropolitana 7520421
Chile

HOME PAGE: http://alum.mit.edu/www/craddatz

Roberto Rigobon (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

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Cambridge, MA 02142
United States
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National Bureau of Economic Research (NBER) ( email )

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