Working Paper

The Long-Run Effects of Monetary Policy


Abstract: Is the effect of monetary policy on the productive capacity of the economy long lived? Yes, in fact we find such impacts are significant and last for over a decade based on: (1) merged data from two new international historical databases; (2) identification of exogenous monetary policy using the macroeconomic trilemma; and (3) improved econometric methods. Notably, the capital stock and total factor productivity (TFP) exhibit hysteresis, but labor does not. Money is non-neutral for a much longer period of time than is customarily assumed. A New Keynesian model with endogenous TFP growth can reconcile all these empirical observations.

Keywords: money neutrality; trilemma; monetary policy; instrumental variables; local projections; hysteresis;

JEL Classification: E51; E01; E30; E32; F42; F44; E44; E47; F33;

https://doi.org/10.24148/wp2020-01

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Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Paper Series

Publication Date: 2020-01-16

Number: 2020-01

Pages: 72