What Have We Learned from Empirical Tests of the Monetary Transmission Effect

The transmission effect of money has been a frequently debated issue. This paper discusses the empirical literature examining the effect of money on real output. In contrast to the commonly held belief that money has a powerful effect on output, most empirical tests of money shows relatively minor, but persistent effects. This is especially true for the extensive VAR literature. The paper focuses on the potential problems and issues that researchers have to account for when designing the empirical tests of the effects of monetary policy. Hopefully this paper will help in generating some discussion about the future direction of the empirical literature.