Monetary economics.

• Author: Mankiw, G. Gregory

Every consumer of the news appreciates the importance of monetary economics. Almost every day, the newspaper contains stories about inflation, deflation, or the next policy move by the Federal Reserve System.

The NBER's Program on Monetary Economics encourages systematic research to better understand monetary policy and related issues in macroeconomics. Although program members share this common goal, they display great diversity in interests, methods, and conclusions. In this brief essay, I describe several recent studies. Although the breadth of program research prevents me from being comprehensive, I offer a glimpse at the kinds of work that this NBER program has been promoting. A complete list of downloadable Working Papers produced by the Monetary Economics Program since 1995 is available at the NBER's Web site, www.nber.org - click on the home page option "Latest Working Papers by Program" and then select "Monetary Economics." In addition to the many Working Papers written by members of the program, three separate volumes summarize larger research projects sponsored by the Monetary Economics Program: Monetary Policy, edited by N. G. Mankiw (University of Chicago Press, 1994); Reducing Inflation, edited by C. Romer and D. Romer (University of Chicago Press, 1997); and Monetary Policy Rules, edited by J. B. Taylor (University of Chicago Press, 1999).

The Effects of Monetary Policy

How does monetary policy affect the economy? This question, more than any other, is at the center of research in the NBER's Program on Monetary Economics. Many papers have attempted to answer this question using various datasets and research methodologies.

In one recent study, Ben S. Bernanke and Ilian Mihov use a statistical method called "structural vector autoregression" to examine two classic propositions about the effects of monetary policy. The first proposition - the liquidity effect - states that monetary expansions lower nominal interest rates in the short run. The second proposition - long-run neutrality - states that monetary policy does not affect real variables (such as employment and production) in the long run. Bernanke and Mihov report that the evidence is consistent with both of these propositions.(1)

Laurence M. Ball reaches a very different conclusion about the long-run effects of monetary policy in his paper "Disinflation and the NAIRU." Ball examines the unemployment experience in a large number of OECD countries during the 1980s. He...