Monetary Policy Effect on the Business Cycle Fluctuations: Output vs. Index Measures of the Cycle

The paper analyzes two questions: (i) the effect of a monetary policy shock on the business cycle and (ii) the extent to which a shift in a monetary policy affects the dynamics of business cycle. Unlike previous literature, to answer these questions, we measure cycle movements by calculating an index from a number of aggregate macroeconomic series via a dynamic factor model. We find that monetary policy shocks have a small but significant impact on persistent and transitory parts of the cycle. A systematic shift of monetary policy has a modest effect.