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May/June 1995, 
Vol. 77, No. 3
Posted 1995-05-01

A Conference Panel Discussion

by Ben S. Bernanke, Thomas F. Cooley, and Manfred J.M. Neumann

Ben Bernanke, Thomas Cooley, and Manfred Neumann each take a different approach to summarizing the profession’s understanding of the effects of monetary policy in this conference panel discussion, "What Do We Know About How Monetary Policy Affects the Economy?" Bernanke argues that the semi-structural VAR approach is a fruitful method for investigating how monetary policy actions are transmitted through the economy. He also finds limited-participation models to be a realistic approach but, sounding a theme reminiscent of Hoover’s comments, argues that the cash-in-advance constraint is implausible. He suggests that a more promising avenue would be to combine the limited-participation and sticky-price assumptions. Cooley argues that the papers presented at the conference seem to take as given that monetary policy can affect the real economy at cyclical frequencies. He argues that the theoretical evidence that the Fed can moderate cyclical fluctuations in economic activity is weak and that the empirical evidence for this proposition is “extremely fragile.” He argues that the evidence based on VARs or structural VARs is sensitive to the set of conditioning variables, the sample period and the identifying restrictions. Moreover, he asserts that models that treat money as exogenous are simply “meaningless.” Neumann examines the structure of what he terms the new money-credit view of monetary policy. Comparing this view with the monetarist view of the transmission mechanism of monetary policy, he concludes that the monetarist approach is the “more comprehensive.” He points out that the monetarist approach assumes that all assets, financial and real, are imperfect substitutes. A change in base money sets in motion a broad process of portfolio substitution over a full array of real and financial assets, and over a broad array of financial institutions and firms. With this as background, Neumann points out how the monetarist approach of Brunner and Meltzer encompasses the traditional IS/LM analysis and the new money-credit view.

A conference panel discussion on "What Do We Know About How Monetary Policy Affects the Economy?"