Topic 3 - Empirical evidence on effect of conventional monetary policy

Question 1

What is a significant and common problem when studying macroeconomic data

Answer 1

There is endogeneity between the dependent and independent variables.

Question 2

What is the problem of endogeneity in real world (equation on mindmap)

Answer 2

Preemptive rise in interest rates

Question 3

what does the simple classical mode predict for monetary policy shocks

Answer 3

To have no effect on the economy in the short and long run

Question 4

What need to be assumed in models for it to be agreed that in the short and long run monetary policy shocks affect the economy.

Answer 4

price rigidity, wage rigidity, informational difficulties, imperfect market structures

Question 5

why is the effect on monetary policy changes in the long run more controversial

Answer 5

neoclassical and new Keynesian economists typically assume no long run effects
post Keynesian economists are typically open to the idea monetary policy shocks have long run effects

Question 6

why do we need a solution to this problem?

Answer 6

to inform policy
to help solve theoretical debates
want to identify changes in monetary policy that are not systematic or predictable

Question 7

who provides a solution

Answer 7

Romer and Romer (1989)

identified dates the federal reserve tried to reduce inflation that were not directly related t the state of the economy.

they found these dates led to a significant decrease in industrial production in the United States.

Question 8

Example of paper that finds rises in interest rates do not reduce output

Answer 8

Uhlig (2005)
Analysis finds a rise in interest rates has no effect on output.

Question 9

What do most papers find?
Example

Answer 9

Negative effect on output following a rise in interest rates

Christiano et al (1999, 2005)
Coibon (2012)

Question 10

What do more papers find

Answer 10

a large and more persistent effect of rises in interest rates on output

Romer and Romer (1989, 2004)
Cloyne (2016)

Question 11

what is the wide understanding

Answer 11

that macroeconomists ability to measure the effects of monetary policy shocks on output is limited.

Question 12

Historical analysis which can be used in the empirical debate

Answer 12

France between 1724 and 1726 (Velde 2009)

Palma (2022) historical data of precious metals in South America (used as random monetary shocks)

More info on these is on the slides.

Question 13

Important point regarding the relationship between theory and data

Answer 13

theories can inform data anaylsis but results from data analysis can then inform new theory.