Thursday, 19 September 2013

Monetary Policy and Capital-Based Macroeconomics: An Empirical Exam ination for the United States (1963–2012)

By Eloy A. Fisher

ABSTRACT: This paper provides an empirical investigation of the role of monetary policy in the determination of interest rates and consumption as developed by capital-based macroeconomics and Austrian business cycle theory, where monetary dislocations caused by central bank action are key to boom and bust business cycles. By way of a vector error correction model (VECM), an econometric method considered a tractable model for Austrian-inspired research in earlier work, we ponder the long-run relationships between monetary aggregates, interest rates and real consumption, and their implied effects over the short run.

Results suggest that the Federal Reserve’s intervention in the loanable funds market, which affects short-term rates directly via the federal funds rate and long interest rates indirectly, dislocates long-run relationships
around a central tendency that seeks to match both rates. Furthermore, we also analyze the volatility of this long-run cointegrated relationship, and find that the dislocation of policy action by the Fed, although muted between the mid-eighties and the late-nineties, resumed since the dot-com boom-bust cycle, with far-from-clear effects in the medium and long run, especially in the wake of the 2008 financial crisis.

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