THE IMPACT OF FED MONETARY POLICY SHOCKS ON INFLATION AND ECONOMIC ACTIVITY: A VECTOR AUTOREGRESSION APPROACH
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monetary policy; federal funds rate; Federal Reserve System; vector autoregression; impulse response functions; inflation; price puzzle; transmission mechanism.Annotatsiya
The article estimates how an unexpected change in the federal funds rate of the Federal Reserve System (Fed) affects industrial production, unemployment and consumer prices. The analysis is based on monthly US data from January 1990 to April 2026 and uses a five-variable vector autoregression (VAR) model with recursive (Cholesky) identification; the results were checked against the 1990–2007 sub-sample, an alternative price measure, the number of lags and the ordering of the variables. After a one-standard-deviation rate shock (approximately 0.12 percentage points), industrial production rose by 0.33% after about 9 months, unemployment fell by 0.17 percentage points, and consumer prices rose by 0.14% over 48 months; that is, in the simple recursive model the theoretically expected signs were not observed for output and prices. The response of unemployment was about 2.6 times smaller in the sub-sample. It is concluded that the results are sensitive to the sample period and the identification specification, and that drawing policy conclusions from such models therefore requires strengthening identification.
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