An evaluation of ‘ Does monetary policy matter ? ’ in the spirit of James Tobin

Christina and David Romer’s paper ‘Does Monetary Policy Matter?’ advocates the so-called ‘narrative’ approach to causal inference. We demonstrate that this method will not sustain causal inference. First, it is impossible to distinguish monetary shocks from oil shocks as causes of recessions. Second, a world in which the Fed only announces intentions to act cannot be distinguished from one in which it in fact acts. Third, the techniques of dynamic simulation used in the Romers’ study are inappropriate and quantitatively misleading. And, finally, their approach provides no basis for establishing causal asymmetry. Key \+wds: Monetary policy; Economic methodology; Business fluctuations JEL class@ficafion: B41; Cl9; E32; E52 On the fatal night of Doria’s collision with the Swedish ship Gripsholm, off Nantucket in 1956, the Irrdv retired to her cabin and.f(icked a light switch. Suddenly there was a great crash, and grinding *Corresponding author. We are grateful to Christina and David Romer for providing us with the data from their paper. We appreciate the detailed comments of Thomas Mayer, James Hartley, Kevin Salyer, and the participants in the U.C. Davis Macroeconomics Brownbag Workshop. We are also grateful to Milton Friedman, James Hamilton, Neil Ericsson, an anonymous referee, and to the participants in seminars at the Federal Reserve Bank of St. Louis, the Board of Governors of the Federal Reserve System, Old Dominion University, and the University of North Carolina, Chapel Hill, for many helpful comments. 0304-3932/94/$07.00