February 1998 | Lawrence J. Christiano, Martin Eichenbaum, Charles L. Evans
This paper reviews recent research on the effects of exogenous shocks to monetary policy, focusing on the qualitative and quantitative implications of these shocks. The authors argue that understanding the impact of such shocks is crucial for assessing the empirical plausibility of structural economic models. While there is no consensus on a single set of assumptions for identifying the effects of monetary policy shocks, there is significant agreement about the general qualitative effects. These effects include short-term interest rates rising, aggregate output, employment, profits, and various monetary aggregates falling, while the aggregate price level responds slowly and wages fall modestly. The paper also discusses the robustness of these findings across different identification schemes and the challenges in interpreting monetary policy rules. The authors suggest a selection scheme for choosing between competing identifying assumptions, emphasizing the importance of ensuring that the impulse response functions are consistent with the models being evaluated. Overall, the paper clarifies the mapping from identification assumptions to inference about the effects of monetary policy shocks, providing valuable insights for both researchers and policymakers.This paper reviews recent research on the effects of exogenous shocks to monetary policy, focusing on the qualitative and quantitative implications of these shocks. The authors argue that understanding the impact of such shocks is crucial for assessing the empirical plausibility of structural economic models. While there is no consensus on a single set of assumptions for identifying the effects of monetary policy shocks, there is significant agreement about the general qualitative effects. These effects include short-term interest rates rising, aggregate output, employment, profits, and various monetary aggregates falling, while the aggregate price level responds slowly and wages fall modestly. The paper also discusses the robustness of these findings across different identification schemes and the challenges in interpreting monetary policy rules. The authors suggest a selection scheme for choosing between competing identifying assumptions, emphasizing the importance of ensuring that the impulse response functions are consistent with the models being evaluated. Overall, the paper clarifies the mapping from identification assumptions to inference about the effects of monetary policy shocks, providing valuable insights for both researchers and policymakers.