View article

THE PRINCIPAL OBJECTIVE of this paper is to increase our understanding of the role of monetary policy in postwar US business cycles. We take as our starting point two common findings in the recent monetary policy literature based on vector autoregressions (VARs).'First, identified shocks to monetary policy explain relatively little of the overall variation in output (typically, less than 20 percent). Second, most of the observed movement in the instruments of monetary policy, such as the federal funds rate or nonborrowed reserves, is endogenous; that is, changes in Federal Reserve policy are largely explained by macroeconomic conditions, as one might expect, given the Fed's commitment to macroeconomic stabilization. These two findings obviously do not support the view that erratic and unpredictable fluctuations in Federal Reserve policies are a primary cause of postwar US business cycles; but neither do they …