The transmission of monetary policy: implications from a dynamic analysis

While there is a reasonable measure of argument among economists of different ideological persuasions concerning the long-run effects of a particular change in monetary policy, there is wide disagreement as to the short-run mechanism by which changes in monetary policy are transmitted through the economy in moving from one position of long-run equilibrium to another. It is the purpose of this dissertation to obtain empirical insight regarding this short-run transmission mechanism. Various theories of the process of monetary adjustment are classified as either Keynesian or monetarist on the basis of whether they emphasize the necessity of interest rate changes for monetary policy to affect spending or whether they emphasize a direct effect of monetary changes on spending. Given these central ideas which characterize the theories of each of these classes, testable hypotheses are formulated which are designed to distinguish between the alternative classes. Three dynamic macro-models of the United States economy are presented and appropriately estimated. Two of these models are Keynesian in nature while the third is a monetarist model based on the work of Karl Brunner and Allan Meltzer