| Abstract: |
This paper empirically assesses whether monetary policy affects real economic
activity through its affect on the aggregate supply side of the macroeconomy.
Analysts typically argue that monetary policy either does not affect the real
economy, the classical dichotomy, or only affects the real economy in the
short run through aggregate demand %G–%@ new Keynesian or new classical
theories. Real business cycle theorists try to explain the business cycle with
supply-side productivity shocks. We provide some preliminary evidence about
how monetary policy affects the aggregate supply side of the macroeconomy
through its affect on total factor productivity, an important measure of
supply-side performance. The results show that monetary policy exerts a
positive and statistically significant effect on the supply-side of the
macroeconomy. Moreover, the findings buttress the importance of
countercyclical monetary policy as well as support the adoption of an optimal
money supply rule. Our results also prove consistent with the effective role
of monetary policy in the Great Moderation as well as the more recent rise in
productivity growth. |