ABSTRACT
The economist’s adage about monetary policy actions is that they affect the economy with “long and variable” lags. This chapter considers some empirical evidence on how long and how variable lags in monetary policy may have been in the past. The economist’s adage about monetary policy actions is that they affect the economy with “long and variable” lags. An estimate of the effect of a monetary policy action on output can be easily obtained from a structural macroeconometric model. Simply measure the difference between two dynamic simulations of the model—one with and one without the policy action. In the models, the financial market repercussions of monetary policy actions affect all categories of real economic activity. Typically, inventory investment is linked most closely to short rates, business fixed investment and residential construction are linked to long rates, household spending on durable goods depends on financial wealth as well as interest rates, and net exports are tied to the exchange rate.
