Chapter

TRANSMISSION MECHANISMS OF MONETARY POLICY: THE EVIDENCE 603

Preview 603

Framework for Evaluating Empirical Evidence 603

Structural Model Evidence 604

Reduced-Form Evidence 604

Advantages and Disadvantages of Structural Model Evidence 605

Advantages and Disadvantages of Reduced-Form Evidence 606

Box 1 Perils of Reverse Causation: A Russian Folk Tale 606

Box 2 Perils of Ignoring an Outside Driving Factor: How to Lose a

Presidential Election 607

Conclusions 607

Early Keynesian Evidence on the Importance of Money 607

Objections to Early Keynesian Evidence 608

Early Monetarist Evidence on the Importance of Money 611

Timing Evidence 611

Statistical Evidence 613

Historical Evidence 615

Overview of the Monetarist Evidence 615

Box 3 Real Business Cycle Theory and the Debate on Money and

Economic Activity 616

Transmission Mechanisms of Monetary Policy 616

Traditional Interest-Rate Channels 617

Other Asset Price Channels 618

Credit View 621

Box 4 Consumers' Balance Sheets and the Great Depression 624

Why Are Credit Channels Likely to Be Important? 625

Application Corporate Scandals and the Slow Recovery from the

March 2001 Recession 625

Lessons for Monetary Policy 626

Application Applying the Monetary Policy Lessons to Japan 628

Summary, Key Terms, Questions and Problems, and Web Exercises 629

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