What Explains the Varying Monetary Response to Technology Shocks in G-7 Countries?

by Neville R. Francis^a, Michael T. Owyang^b and Athena T. Theodorou^c

Abstract

In a recent paper, Galí, López-Salido, and Vallées (2003) examined the Federal Reserve’s response to VAR-identified technology shocks. They found that during the Martin-Burns- Miller era, the Federal Reserve responded to technology shocks by overstabilizing output, while in the Volcker-Greenspan era, the Federal Reserve adopted an inflation-targeting rule. We extend their analysis to countries of the G-7; moreover, we consider the factors that may contribute to differing monetary responses across countries. Specifically, we find a relationship between the volatility of capital investment, the type of monetary policy rule, the responsiveness of the rule to output and inflation fluctuations, and the response to technology shocks.

JEL Codes: C32, E2, E52.

 
Full article (PDF, 39 pages 369 kb)

^a Department of Economics, University of North Carolina
^b Research Department, Federal Reserve Bank of St. Louis
^c Planning Department, Cyprus Tourism Organization