The Instability In The Monetary Policy Reaction Function And The Estimation Of Monetary Policy Shocks

This paper uses the conventional wisdom about the shift in the monetary policy stance in 1979 to compute monetary policy shocks by estimating different monetary policy reaction functions for the pre-1979 and post-1979 time periods. The authors use the information from the internal forecasts of the Federal Reserve to derive monetary policy shocks. The results in this paper show that a monetary policy shock in the pre-1979 period affects output and prices much more strongly and quickly than what has been reported in the literature for the full sample. The findings suggest that the dynamic response of output and prices to a monetary policy shock declined significantly between 1980-2001.