BEN S. BERNANKE, MARK GERTLER, AND MARK WATSON examine the role of systematic monetary policy in postwar U.S. business cycles, focusing on the effects of oil price shocks. They use vector autoregressions (VARs) to analyze how monetary policy affects the economy. Their findings suggest that monetary policy shocks explain only a small portion of output variation, and that most monetary policy changes are endogenous, driven by macroeconomic conditions. However, they argue that systematic monetary policy—such as the Fed's policy rule—can significantly influence the economy. The authors address the challenge of measuring the effects of monetary policy rules on the economy, noting that standard VARs lack structural interpretation. They propose a modified VAR approach that incorporates the term structure of interest rates and the expectations theory of the term structure. This allows them to assess the effects of alternative monetary policy responses on the economy. They focus on oil price shocks, which are significant in explaining postwar U.S. recessions. They find that oil price shocks have complex effects on the economy, and that endogenous monetary policy responses can account for a substantial portion of the negative effects of oil price shocks. They compare the effects of oil price shocks with those of monetary policy shocks and find that both play important roles in economic downturns. The authors also examine the robustness of their findings, finding that endogenous monetary policy is an important component of the aggregate impact of oil price shocks. They conclude that monetary policy plays a significant role in economic fluctuations, and that the effects of oil price shocks are often intertwined with monetary policy responses. The paper highlights the difficulty of identifying the effects of oil price shocks in a VAR framework, and the importance of using appropriate indicators. They choose the "net oil price increase" variable proposed by Hamilton as their principal measure of oil price shocks. They find that this variable produces reasonable results in a VAR setting. The authors also discuss the limitations of their approach, noting that it is not fully structural and is subject to the Lucas critique. However, they argue that it provides a reasonable approximation of the effects of anticipated monetary policy. Overall, the paper contributes to the understanding of the role of monetary policy in postwar U.S. business cycles, and highlights the complex interactions between monetary policy and oil price shocks. The authors conclude that systematic monetary policy plays an important role in shaping the economy, and that oil price shocks are a significant factor in economic fluctuations.BEN S. BERNANKE, MARK GERTLER, AND MARK WATSON examine the role of systematic monetary policy in postwar U.S. business cycles, focusing on the effects of oil price shocks. They use vector autoregressions (VARs) to analyze how monetary policy affects the economy. Their findings suggest that monetary policy shocks explain only a small portion of output variation, and that most monetary policy changes are endogenous, driven by macroeconomic conditions. However, they argue that systematic monetary policy—such as the Fed's policy rule—can significantly influence the economy. The authors address the challenge of measuring the effects of monetary policy rules on the economy, noting that standard VARs lack structural interpretation. They propose a modified VAR approach that incorporates the term structure of interest rates and the expectations theory of the term structure. This allows them to assess the effects of alternative monetary policy responses on the economy. They focus on oil price shocks, which are significant in explaining postwar U.S. recessions. They find that oil price shocks have complex effects on the economy, and that endogenous monetary policy responses can account for a substantial portion of the negative effects of oil price shocks. They compare the effects of oil price shocks with those of monetary policy shocks and find that both play important roles in economic downturns. The authors also examine the robustness of their findings, finding that endogenous monetary policy is an important component of the aggregate impact of oil price shocks. They conclude that monetary policy plays a significant role in economic fluctuations, and that the effects of oil price shocks are often intertwined with monetary policy responses. The paper highlights the difficulty of identifying the effects of oil price shocks in a VAR framework, and the importance of using appropriate indicators. They choose the "net oil price increase" variable proposed by Hamilton as their principal measure of oil price shocks. They find that this variable produces reasonable results in a VAR setting. The authors also discuss the limitations of their approach, noting that it is not fully structural and is subject to the Lucas critique. However, they argue that it provides a reasonable approximation of the effects of anticipated monetary policy. Overall, the paper contributes to the understanding of the role of monetary policy in postwar U.S. business cycles, and highlights the complex interactions between monetary policy and oil price shocks. The authors conclude that systematic monetary policy plays an important role in shaping the economy, and that oil price shocks are a significant factor in economic fluctuations.