Global Forces and Monetary Policy Effectiveness

Marc Giannoni

84 citations0/0 files storedNational Bureau of Economic Research

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Monetary Policy and Economic Impact Global Financial Crisis and Policies Market Dynamics and Volatility

Abstract

In this paper, we quantify the changes in the relationship between international forces and many key US macroeconomic variables over the 1984-2005 period, and analyze changes in the monetary policy transmission mechanism.We do so by estimating a Factor-Augmented VAR on a large set of US and international data series.We find that the role of international factors in explaining US variables has been changing over the 1984-2005 period.However, while some US series have become more correlated with global factors, there is little evidence suggesting that these factors have become systematically more important.We don't find strong evidence of a change in the transmission mechanism of monetary policy due to global forces.Taking our point estimates literally, global forces do not seem to have played an important role in the US monetary transmission mechanism between 1984 and 1999.In addition, since the year 2000, the initial response of the US economy following a monetary policy shock ---the first 6 to 8 quarters ---is essentially the same as the one that has been observed in the 1984-1999 period.However, point estimates suggest that the growing importance of global forces might have contributed to reducing some of the persistence in the responses, two or more years after the shocks.Overall, we conclude that if global forces have had an effect on the monetary transmission mechanism, this is a recent phenomenon.

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References

2000Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory*2007Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach 1993Tests for Parameter Instability and Structural Change With Unknown Change Point 2002Macroeconomic Forecasting Using Diffusion Indexes 2007The external wealth of nations mark II: Revised and extended estimates of foreign assets and liabilities, 1970–2004 2005Drifts and volatilities: monetary policies and outcomes in the post WWII US n.d.Output Fluctuations in the United States: What Has Changed since the Early 1980's?2005Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach

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