A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions

Deteriorating economic conditions in late 2008 led the Federal Reserve to lower the target federal funds rate to near zero, inject liquidity into the financial system through novel facilities, and engage in large scale asset purchases. The combination of conventional and unconventional policy measures prevents using the effective federal funds rate to assess the effects of monetary policy in samples that extend beyond 2008. This paper develops an approach to identify the effects of monetary policy shocks in such instances. We employ a newly created broad monetary aggregate to elicit the effects of monetary policy shocks both prior to and after 2008. Our model is bolstered by its ability to produce plausible responses to monetary policy shocks free from price, output, and liquidity puzzles that have plagued other approaches