The Impact of Monetary Policy Shock on Macroeconomic Variables

Abstract

Researchers have used macroeconomic models to assess the monetary transmission process. Employing a Dynamic Stochastic General Equilibrium model, the study shows that a monetary policy shock in the form of an unanticipated rise in the interest rate causes real output and inflation to fall. The results are consistent with those obtained from other two New Keynesian models used to check the robustness of the findings. As regards the degree of inflation and output persistence, the benchmark model shows low level of inflation persistence but no output persistence under all monetary rules. The other two models show some degree of output and inflation persistence for all the three monetary rules. Finally, it looks as if the choice of monetary policy rule determines the degree of output and inflation persistence.