Abstract
This paper studies whether the effectiveness of the federal funds rate has changed over time by analyzing output, inflation, and unemployment rate. My research on this topic is a continuation of Jean Boivin and Marc Giannoni’s paper “Has Monetary Policy Become Less Powerful?” whose latest version was published in January 2002. I observe monetary policy shocks in the last ~60 years using relevant data from FRED of the U.S. GDP (output), inflation, unemployment, and the effective federal funds rate. This paper analyzes how past changes in monetary policy impacted relevant economic data in the near-term future while separating the effects of changes in the economy from changes in the conduct of monetary policy just as Boivin and Giannoni had done. It uses the VAR model, SVAR model, and impulse response functions that update Boivin and Giannoni’s empirical analysis, as well as conducting functionality and stability tests to verify significant results. The main finding is that when controlling for the systematic mechanisms of monetary policy, monetary policy has been conducted in a more stabilizing manner after 1980 which largely explains the reduced effect of the federal funds rate shown in the VAR models during the late 1990s and early 2000s. Thus, monetary policy has not become less powerful. This research is important not only because it updates outdated monetary policy research, but it also invigorates more conversation about inflation and monetary policy, at a time when inflation is impacting so many people’s decisions.