What Have We Learned from Empirical Tests of the Monetary Transmission Effect?

The transmission effect of money has been a frequently debated issue. This paper discusses the empirical literature examining the effect of money on real output. In contrast to the commonly held belief that money has a powerful effect on output, most empirical tests of money shows relatively minor, but persistent effects. This is especially true for the extensive VAR literature. The paper focuses on the potential problems and issues that researchers have to account for when designing the empirical tests of the effects of monetary policy. Hopefully this paper will help in generating some discussion about the future direction of the empirical literature. Note: I am grateful for comments from the participants in the presentation at the Swedish Central Bank. I am especially indebted to Anders Vredin, for his careful reading of this paper, and for the numerous useful suggestions. The views expressed in this paper are solely the responsibility of the author, and should not be interpreted as reflecting the views of the Executive Board of Sveriges Riksbank.