This paper re-examines the evolution in the US monetary transmission mechanism using an empirical framework that incorporates substantially more information than the standard trivariate VAR model used in most previous studies. In particular, we employ an extended version of the factor-augmented VAR proposed by Bernanke et al. (2005). Our extensions include allowing for time variation in the coefficients and stochastic volatility in the variances of the shocks. Our formulation has two clear advantages over earlier work: (i) We identify the monetary policy shock using a model that includes around 600 macroeconomic and financial variables, hence making it less likely that our model suffers from the shortcomings of small-scale models, (ii) our model allows us to estimate time-varying impulse responses for each of the variables contained in our panel. Therefore, we are able to provide results for the variation in the responses of a wide variety of variables to a monetary policy shock. In particular, this paper not only provides evidence about changes in the dynamics of main macroeconomic aggregates, but also of components of the consumption deflator and disaggregated consumption quantities.

Abstract not found

Based on standard New Keynesian models I show that policy counterfactuals based on the theoretical structural VAR representations of the models fail to reliably capture the impact of changes in the parameters of the Taylor rule on the (reduced-form) properties of the economy. Based on estimated models for the Great Inflation and the most recent period, I show that, as a practical matter, the problem appears to be non-negligible. I show analytically that the problem (i) is a straightforward implication of the cross-equations restrictions imposed by rational expectations on a model’s structural solution; and (ii) it is independent of the issue of parameter identification. These results imply that the outcomes of SVAR-based policy counterfactuals should be regarded with caution, as their informativeness for the specific issue at hand–e.g., understanding the role played by monetary policy in exacerbating the Great Depression, causing the Great Inflation, or fostering the Great Moderation–is, in principle, open to question.

This chapter updates the Bordo and Schwartz chapter in Volume 1A of the Handbook of Macroeconomics to the period 1979-2008.

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In 2010 all ECB publications feature a motif taken from the €500 banknote. NOTE: This Working Paper should not be reported as representing the views of the European Central Bank (ECB). The views expressed are those of the authors and do not necessarily reflect those of the ECB. This paper can be downloaded without charge from

We combine an estimated monetary policy rule featuring time-varying trend in‡ation and stochastic coefficients with a medium scale New Keynesian framework calibrated on the U.S. economy. We find the impact of variations in trend inflation on the likelihood of equilibrium determinacy to be both modest and limited to the second half of the 1970s. In contrast, our counterfactual exercises suggest that the change in the Federal Reserve’s policy response to in‡ation is likely to have been the main driver leading the U.S. economy to a unique equilibrium during the Great Moderation. We highlight the impact of wage indexation on policymakers’ ability to induce economic stability, and provide fresh evidence on the relationship between trend inflation, wage indexation and determinacy in the post-WWII U.S. economic environment. Further simulations show that rising the Federal Reserve’s inflation target to four percent would be consistent with equilibrium uniqueness conditional on a policy as the one estimated on the U.S. post-1982 sample period.