Assessing Changes in the Monetary Transmission Mechanism: A VAR Approach

The authors argue that a change in monetary policy transmission explains much of the increased stability of output and inflation since the beginning of the 1980s. Their statistical analysis shows that monetary policy "shocks"—unexpected movements in the federal funds rate, the Federal Reserve's key policy instrument—have a weaker effect on output and inflation than in the past. While this finding could be interpreted to mean that monetary policy is now less potent than in the past, it could also indicate that monetary policy is now aimed more directly at minimizing the variability of inflation and output.