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Technology Shocks and Monetary Policy: Revisiting the Fed's Performance


  • We would like to thank F. Collard, M. Dupaigne, M. Jonsson, H. Le Bihan, J. Linde, J.G. Sahuc, F. Smets, R. Wouters, and participants at Banque de France workshops and T2M conference for comments and suggestions, and S. Basu for sharing his data. Special thanks to P. Fève and an anonymous referee, whose detailed comments on an earlier draft greatly improved the paper. The remaining errors are ours. The views expressed herein are those of the authors and do not necessarily reflect those of the Banque de France.


Would the U.S. economy's dynamic response to permanent technology shocks have been different from the actual responses if monetary authorities' systematic response to these shocks had been optimal? To answer this question, we characterize the dynamic effects of permanent technology shocks and the way in which U.S. monetary authorities reacted to these shocks over the sample 1955(1)–2002(4) using a structural VAR. A sticky price–sticky wage model is developed and estimated to reproduce these responses. We then formally compare these responses with the outcome of the optimal monetary policy.