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Measuring Systematic Monetary Policy

Author

Listed:
  • Oscar Jorda
  • Kevin Hoover

    (Department of Economics, University of California Davis)

Abstract
The 1970s and early 1980s witnessed two main approaches to the analysis of monetarypolicy. The first is the early new classical approach of Lucas, based on the assumptionsof rational expectations and market clearing. The second is the atheoretical econometricsof Sims?s VAR program. Both have developed: the new classical approach has beenenriched through various accounts of price stickiness, cost of adjustment or alternativeexpectational schemes; the original VAR program has developed into the structural VARprogram. This paper clarifies the relationship between these two programs. Based onwork of Cochrane (1998), it shows that the typical method of evaluating unanticipated,unsystematic monetary policy is correct only if the conditions necessary for Lucas?spolicy-ineffectiveness proposition hold, while recent methods for evaluating systematicmonetary policy violate Lucas?s policy-noninvariance proposition (?the Lucas critique?).The paper shows how to construct and estimate (using regime changes) a model in whichsome agents form rational-expectations and others follow rules of thumb. In such amodel, monetary policy actions can be validly decomposed into systematic andunsystematic components and valid counterfactual experiments on alternative systematicmonetary-policy rules can be evaluated.

Suggested Citation

  • Oscar Jorda & Kevin Hoover, 2000. "Measuring Systematic Monetary Policy," Working Papers 203, University of California, Davis, Department of Economics.
    • Handle: RePEc:cda:wpaper:203
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    References listed on IDEAS

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    2. Filardo, Andrew & Hubert, Paul & Rungcharoenkitkul, Phurichai, 2022. "Monetary policy reaction function and the financial cycle," Journal of Banking & Finance, Elsevier, vol. 142(C).
    3. Andrew Filardo & Paul Hubert & Phurichai Rungcharoenkitkul, 2019. "The reaction function channel of monetary policy and the financial cycle," SciencePo Working papers Main hal-03403260, HAL.
    4. Hanson, Michael S., 2006. "Varying monetary policy regimes: A vector autoregressive investigation," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 407-427.
    5. Brady, Ryan R., 2014. "The spatial diffusion of regional housing prices across U.S. states," Regional Science and Urban Economics, Elsevier, vol. 46(C), pages 150-166.
    6. Oscar Jorda & Kevin Salyer, 2003. "The Response of Term Rates to Monetary Policy Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 941-962, October.
    7. Kirstin Hubrich & Peter Vlaar, 2004. "Monetary transmission in Germany: Lessons for the Euro area," Empirical Economics, Springer, vol. 29(2), pages 383-414, May.
    8. Fabio Milani & John Treadwell, 2012. "The Effects of Monetary Policy “News” and “Surprises”," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1667-1692, December.
    9. Ajisafe, Rufus A. & Adesina, Kehinde E. & Okunade, Solomon O., 2022. "Effects of Anticipated and Unanticipated Monetary Policy on Output in Nigeria," African Journal of Economic Review, African Journal of Economic Review, vol. 10(2), March.
    10. Piyachart Phiromswad, 2014. "Measuring monetary policy with empirically grounded identifying restrictions," Empirical Economics, Springer, vol. 46(2), pages 681-699, March.
    11. Bachmeier, Lance, 2008. "Monetary policy and the transmission of oil shocks," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1738-1755, December.
    12. Martin Lettau & Sydney C. Ludvigson & Charles Steindel, 2002. "Monetary policy transmission through the consumption-wealth channel," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 117-133.
    13. Kenneth N. Kuttner & Patricia C. Mosser, 2002. "The monetary transmission mechanism: some answers and further questions," Economic Policy Review, Federal Reserve Bank of New York, vol. 8(May), pages 15-26.
    14. Fabio Milani & John Treadwell, 2012. "The Effects of Monetary Policy “News” and “Surprises”," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(8), pages 1667-1692, December.

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    More about this item

    Keywords

    monetary policy;

    JEL classification:

    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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