Does Monetary Policy Generate Recessions?

Christopher A. Sims and Tao A. Zha
Federal Reserve Bank of Atlanta
Working Paper 98-12
July 1998

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The issue of uncovering the effects of monetary policy is far short of resolution. In the identified VAR literature, restrictions have been imposed to identify the effects of unpredictable monetary policy disturbances. We offer critical views on the unreasonable assumptions in the existing work and argue for careful economic argument about identifying assumptions. We display a structural stochastic equilibrium model in which our VAR identification would produce correct results while drawing attention to the serious lack of time series fit in most of the DSGE literature.

JEL classification: E5

Key words: unpredictable disturbances, monetary policy, identification

The views expressed here are those of the authors and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors' responsibility.

Please address questions regarding content to Christopher A. Sims, Henry Ford II Professor of Economics, Yale University, 37 Hillhouse Avenue, New Haven, Connecticut 06520, 203/432-6292,; or Tao A. Zha, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, NW, Atlanta, Georgia 30303-2713, 404/498-8353,