Tao Zha
Economic Review, Vol. 82, No. 2, 1997

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The question of the quantitative effect of monetary policy has been of considerable debate for decades. Economists' beliefs about it stem largely from theoretical models that imply the effects of changing monetary policy, and different experiments or theories lead to different conclusions. The actual economy, however, is not the result of any such controlled experiment. In the real world, inferences about the quantitative effect of monetary policy must rely on observations of actual economic activity in which many variables are changing simultaneously.

This article argues that to assess the actual effect of monetary policy requires understanding the interaction among all players in the economy—the central bank, financial market participants, producers, and consumers. The author first explains the conceptual importance of sorting out the central bank's behavior from that of the many other players. He then discusses difficulties involved in sorting out such a behavior in any given country. Finally, he illustrates this sorting-out process with a few examples in the economics literature.

June 1997