What Explains the Varying Monetary Response to Technology Shocks in G-7 Countries?
by Neville R. Francisa, Michael T. Owyangb and Athena T. Theodorouc
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