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Volume 4, No. 1,
April 2005
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Output
Variability and the Money-Output Relationship
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Hany Guirguis*
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Department of Economics and Finance,
Manhattan College, U.S.A.
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Martin B. Schmidt
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Department of Economics, College of
William and Mary, U.S.A.
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Abstract
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The present
paper incorporates a rolling regression approach to
examine the sensitivity of output responses to monetary
shocks. In doing so, the paper finds that the impact of
monetary shocks is highly variable. Specifically, the
output responses are estimated to be significant during
the 1970s and 1990s but not during the 1980s. Several
recent authors have suggested that the effectiveness of
monetary policy is impacted by the stability of the
economic environment, i.e., that the noise associated
with estimating the true output level makes it difficult
for the monetary authority to “hit its target” or even
to estimate the correct target. In this case, supposed
optimal policy may produce any number of possible output
responses and none of these consistently. The present
results provide additional evidence, as the magnitude of
output response appears to be negatively related with
the degree of output variability.
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Key words
:
monetary shocks; money-income
relationship; rolling vector auto regression (VAR)
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JEL classification
:
E52; C32
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