Examining a Contractionary Monetary Policy Shock over Two Regimes

Abstract

The goal of this thesis is to improve on the work done by Lawrence J. Christiano, Martin Eichenbaum, and Charles Evans in the 1996 article “The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds”. In order to do so, proof is provided as to why a continuous sample from 1960:I to 1992:IV is inappropriate when using the Federal funds rate to show how monetary policy shocks affect the liabilities of the nonfinancial business sector. After correcting the data set, performing a vector autoregression and analyzing the output, support for the credit view as the monetary transmission mechanism is shown. Support showing how noncorporate businesses are affected disproportionately by contractionary shocks is also provided.