Assessing Changes in the Monetary Transmission Mechanism: A VAR Approach

Several authors have documented a reduced variability ofoutput and inflation in the United States since the beginningof the 1980s.1 In fact, a comparison of the 1980:1-2001:2 periodwith the two preceding decades shows that the standarddeviation of quarterly output growth has fallen 30 percent,while the standard deviation of inflation has decreased morethan 40 percent. These changes in the time series properties ofoutput and inflation raise a number of important questions forpolicymakers. For instance, has this increased stability beenassociated with an alteration of the transmission of monetarypolicy due, for example, to changes in the behavior ofconsumers, firms, or the Federal Reserve? Does monetarypolicy still affect inflation and output as much as it did in the1960s and 1970s? Should we expect the reduced volatility of theU.S. economy to last?