Monetary Policy Shocks: What Have We Learned and To What End? Lawrence J. Christiano, Martin Eichenbaum, and Charles L. Evans NBER Working Paper No. 6400 February 1998 JEL Nos. E3, E4 ## Abstract This paper reviews recent research on the effects of exogenous monetary policy shocks. It argues that this question is central to assessing the empirical plausibility of structural economic models used to analyze systematic changes in monetary policy institutions and rules. The literature has not yet converged on a particular set of assumptions for identifying the effects of monetary policy shocks. However, there is considerable agreement on the qualitative effects of such shocks across different identification schemes. The paper documents this agreement regarding key economic aggregates. The authors discuss three general strategies for isolating monetary policy shocks. The first involves making identifying assumptions to estimate the parameters of the Federal Reserve's feedback rule. The second strategy involves data that purportedly signal exogenous monetary policy actions. The third strategy assumes that monetary policy shocks do not affect economic activity in the long run. The paper finds that after a contractionary monetary policy shock, short-term interest rates rise, aggregate output, employment, profits, and various monetary aggregates fall, while the aggregate price level responds slowly. Monetary policy shocks account for only a modest percentage of the volatility of aggregate output and even less of the movements in the aggregate price level. The paper also discusses the difficulties of interpreting estimated monetary policy rules and the narrative approach to assessing the effects of monetary policy shocks. It concludes that the Lucas program, as applied to monetary policy shocks, is already proving to be a fruitful one.Monetary Policy Shocks: What Have We Learned and To What End? Lawrence J. Christiano, Martin Eichenbaum, and Charles L. Evans NBER Working Paper No. 6400 February 1998 JEL Nos. E3, E4 ## Abstract This paper reviews recent research on the effects of exogenous monetary policy shocks. It argues that this question is central to assessing the empirical plausibility of structural economic models used to analyze systematic changes in monetary policy institutions and rules. The literature has not yet converged on a particular set of assumptions for identifying the effects of monetary policy shocks. However, there is considerable agreement on the qualitative effects of such shocks across different identification schemes. The paper documents this agreement regarding key economic aggregates. The authors discuss three general strategies for isolating monetary policy shocks. The first involves making identifying assumptions to estimate the parameters of the Federal Reserve's feedback rule. The second strategy involves data that purportedly signal exogenous monetary policy actions. The third strategy assumes that monetary policy shocks do not affect economic activity in the long run. The paper finds that after a contractionary monetary policy shock, short-term interest rates rise, aggregate output, employment, profits, and various monetary aggregates fall, while the aggregate price level responds slowly. Monetary policy shocks account for only a modest percentage of the volatility of aggregate output and even less of the movements in the aggregate price level. The paper also discusses the difficulties of interpreting estimated monetary policy rules and the narrative approach to assessing the effects of monetary policy shocks. It concludes that the Lucas program, as applied to monetary policy shocks, is already proving to be a fruitful one.