Abstract
We investigate the effects of U.S. monetary policy shocks from two alternative policy indicators for a modern sample encompassing 1988-2020. The choice of the Wu and Xia (2016) shadow federal funds rate leads to persistent price puzzles. These puzzles arise despite inclusion of the usual suspect fixes such as commodity prices, federal funds futures and forward rate data. We find they occur at monthly and quarterly frequencies in time-varying and constant-parameter approaches. We consider an alternative indicator with the same broad monetary aggregate Keating et al. (2019) employed in their investigation of a historical sample. This alternative provides a consistent resolution of the price puzzle and it does not require the ad hoc inclusion of commodity prices or futures data. While this price puzzle correction is not a feature of our time-varying approach—as it also obtains from constant parameter econometric estimation—our analysis suggests monetary policy has transmitted substantial expansionary effects in money markets in the aftermath of the 2007 Financial Crisis and the decade that followed.
Monetary Transmission in Money Markets: The Not-So-Elusive Missing Piece of the Puzzle
The Problem: When Standard Monetary Models Don’t Work
For decades, economists have tried to understand how Federal Reserve policy affects the economy. The standard approach has been to focus on the federal funds rate - the interest rate banks charge each other for overnight loans - as the primary tool for measuring monetary policy effects. However, this approach has consistently produced a puzzling result known as the “price puzzle” (first identified by Eichenbaum, 1992).
The price puzzle occurs when economic models show that lowering interest rates (which should stimulate the economy and raise prices) actually leads to falling prices instead - the opposite of what economic theory predicts. This has been a persistent problem in monetary economics, with researchers trying various fixes like including commodity prices or federal funds futures data, as suggested by influential work like Christiano et al. (1999).
The Alternative: Bringing Money Back into Monetary Economics
Chen and Valcarcel investigate whether using monetary aggregates instead of interest rates can solve this puzzle. Monetary aggregates are measures of the total money supply in the economy. However, rather than using the Federal Reserve’s traditional “simple-sum” measures (like M1 and M2), they focus on Divisia monetary aggregates - more sophisticated measures developed by William Barnett in the 1980s.
Divisia aggregates are superior because they recognize that different types of money (cash, checking accounts, savings accounts, etc.) provide different levels of liquidity services and should be weighted accordingly, rather than simply added together. As Belongia and Ireland (2014) noted, “virtually all monetary economists today would concede that the Divisia aggregates proposed by Barnett are both theoretically and empirically superior to their simple-sum counterparts.”
Key Findings
Using data from 1988 to 2020, the authors employ advanced econometric techniques called time-varying parameter vector autoregressions (TVP-VAR) and factor-augmented VARs (TVP-FAVAR) to compare how the economy responds to shocks in different monetary policy indicators.
1. Interest Rate Models Consistently Fail
The researchers find that models using the Wu and Xia (2016) shadow federal funds rate - an extended measure that accounts for near-zero interest rates during and after the 2007-2008 financial crisis - consistently produce price puzzles. Even when they include the traditional “fixes” like commodity prices or federal funds futures data, the puzzle persists.
2. Divisia Money Resolves the Puzzles
In stark contrast, when they replace the federal funds rate with Divisia monetary aggregates (particularly DM4, the broadest measure), the price puzzles disappear entirely. The economic responses become sensible: expansionary monetary policy leads to higher output and prices, as theory predicts.
3. Money Markets Show Dramatic Changes After 2008
The study also examines how monetary policy affects specific money markets (currency, bank deposits, money market funds, Treasury bills, etc.). They find that the 2007 financial crisis marked a significant shift in how monetary policy transmits through these markets, with much larger responses in the post-crisis period.
Why This Matters
The findings have important implications for both economic research and policy:
For Research: The results suggest that the long-standing focus on interest rates in monetary models may be misguided, particularly in the modern era. As the authors note, increased Federal Reserve transparency and forward guidance may have made interest rate movements more predictable and less informative about monetary policy stance.
For Policy: The research indicates that traditional measures of monetary policy effectiveness may be inadequate. During periods like quantitative easing (when the Fed purchased large amounts of securities), monetary aggregates may provide better insight into policy transmission than interest rates.
For Understanding the Modern Economy: The study highlights how financial innovation and the shift from reserve scarcity to abundance (post-2008) has fundamentally altered monetary transmission mechanisms.
The Broader Context
This work builds on a growing literature questioning the New Keynesian consensus that largely abandoned monetary aggregates in favor of interest rate rules. Earlier work by Keating et al. (2019) and Belongia and Ireland (2015, 2018) has similarly argued for rehabilitating the role of money in monetary models.
The authors conclude that “putting money back in monetary models offers a viable alternative” in an environment where key short-term rates are persistently low and the banking system has transitioned to abundant reserves. Rather than being an obsolete relic, properly measured money may indeed be “the missing piece of the puzzle” in understanding modern monetary transmission.
References:
Belongia, M.T., Ireland, P.N. (2014). The barnett critique after three decades: A new keynesian analysis. Journal of Econometrics, 183, 5-21.
Chen, Z., Valcarcel, V.J. (2021). Monetary transmission in money markets: The not-so-elusive missing piece of the puzzle. Journal of Economic Dynamics and Control, 131, 104214.
Christiano, L.J., Eichenbaum, M., Evans, C.L. (1999). Monetary policy shocks: What have we learned and to what end? Handbook of Macroeconomics, Volume 1A, 65-148.
Eichenbaum, M. (1992). Comments on interpreting the time series facts: The effects of monetary policy. European Economic Review, 36, 1001-1011.
Keating, J.W., Kelly, L.J., Smith, A.L., Valcarcel, V.J. (2019). A model of monetary policy shocks for financial crises and normal conditions. Journal of Money, Credit and Banking, 51, 227-259.
Chen, Zhengyang, and Victor J. Valcarcel. “Monetary transmission in money markets: The not-so-elusive missing piece of the puzzle.” Journal of Economic Dynamics and Control 131 (October 2021): 104214. https://doi.org/10.1016/j.jedc.2021.104214.
📚 Academic Citations & Literature Review
Papers and Topics That Could Cite Chen & Valcarcel (2021)
Chen, Zhengyang, and Victor J. Valcarcel. “Monetary transmission in money markets: The not-so-elusive missing piece of the puzzle.” Journal of Economic Dynamics and Control 131 (October 2021): 104214. https://doi.org/10.1016/j.jedc.2021.104214.
Core Monetary Economics Literature
1. Monetary Policy Transmission Mechanisms
Papers investigating how monetary policy affects the real economy through different channels
Studies on the “black box” of monetary transmission, particularly during unconventional policy periods
Research on time-varying monetary transmission mechanisms
Cross-country studies comparing monetary transmission effectiveness
2. Price Puzzle Literature
Any future work attempting to resolve price puzzles in VAR models
Papers testing robustness of price puzzle solutions across different time periods
Studies comparing different identification strategies for monetary policy shocks
Meta-analyses of price puzzle findings across studies
3. Monetary Aggregates and Money Demand
Papers advocating for renewed focus on monetary quantities in policy analysis
Studies using Divisia monetary aggregates for forecasting or policy evaluation
Research on the information content of different monetary aggregates
Money demand studies, particularly those using Divisia measures
Econometric and Methodological Applications
4. Time-Varying Parameter Models
Papers using TVP-VAR or TVP-FAVAR methodologies
Studies investigating structural breaks in monetary policy transmission
Research on parameter instability in macroeconomic relationships
Methodological papers comparing constant vs. time-varying parameter models
5. VAR and FAVAR Literature
Studies using factor-augmented VARs for monetary policy analysis
Papers comparing different identification schemes in structural VARs
Research on high-dimensional VAR models in macroeconomics
Methodological advances in FAVAR estimation
Central Banking and Policy Analysis
6. Federal Reserve Policy Evaluation
Papers assessing effectiveness of post-2008 unconventional monetary policies
Studies on quantitative easing transmission mechanisms
Research on forward guidance and its effects on monetary transmission
Central bank communication and policy transparency studies
7. Shadow Rate and Zero Lower Bound Literature
Papers using or critiquing shadow interest rate measures
Studies on monetary policy effectiveness at the zero lower bound
Research comparing different approaches to measuring policy stance during ELB periods
International comparisons of unconventional monetary policies
8. Financial Crisis and Post-Crisis Analysis
Papers analyzing structural changes in financial markets post-2007
Studies on “new normal” monetary policy transmission
Research on how financial innovation affects monetary transmission
Banking sector studies focusing on reserve abundance effects
Financial Markets and Money Markets
9. Money Market Studies
Research on specific money market instruments (repos, commercial paper, etc.)
Studies on money market mutual funds and their role in transmission
Papers on Treasury markets and Federal Reserve operations
Research on bank funding markets and monetary policy
10. Financial Innovation and Market Structure
Papers on how financial innovation affects monetary transmission
Studies on the evolution of payment systems and money demand
Research on digital currencies and their implications for monetary aggregates
Papers on shadow banking and its interaction with monetary policy
International and Comparative Studies
11. Cross-Country Monetary Analysis
Comparative studies of monetary transmission across countries
Papers applying similar methodologies to other central banks (ECB, BOJ, BOE)
Research on monetary transmission in emerging market economies
Studies on currency unions and monetary transmission heterogeneity
12. International Spillovers
Papers on how U.S. monetary policy affects global financial markets
Studies on monetary transmission through exchange rate channels
Research on global financial cycles and monetary policy
International capital flow studies
Macroeconomic Modeling and Theory
13. DSGE and New Keynesian Models
Papers incorporating monetary aggregates into DSGE frameworks
Studies questioning interest rate rules in NK models
Research on microfoundations for monetary aggregates
Models with financial frictions and monetary transmission
14. Macroeconomic Forecasting
Papers using monetary aggregates for inflation or output forecasting
Studies comparing forecasting performance of different monetary indicators
Real-time forecasting papers incorporating money measures
Research on leading indicators for monetary policy
Specialized Applications
15. Inflation and Price Level Studies
Papers investigating drivers of post-crisis low inflation
Studies on inflation expectations and monetary aggregates
Research on deflation risks and monetary policy responses
Sectoral inflation studies and monetary transmission
16. Banking and Credit Markets
Papers on bank lending channels of monetary transmission
Studies on credit creation and monetary aggregates
Research on bank reserves and lending behavior
Papers on deposit flows and monetary policy
17. Asset Price Studies
Research on monetary policy effects on stock markets, bond markets, real estate
Studies on asset price bubbles and monetary aggregates
Papers on wealth effects and monetary transmission
Risk-taking channel studies
Policy and Regulatory Analysis
18. Financial Regulation Impact
Papers on how post-crisis regulations affect monetary transmission
Studies on Basel III effects on money markets
Research on liquidity regulations and monetary policy
Papers on macroprudential policy interactions
19. Central Bank Design and Operations
Studies on optimal monetary policy frameworks
Research on central bank balance sheet policies
Papers on implementation of monetary policy in abundant reserve systems
Studies on central bank digital currencies (CBDCs)
Historical and Long-Run Perspectives
20. Monetary History
Papers providing historical perspective on monetary aggregates
Studies on long-run relationships between money and economic activity
Research on historical episodes of monetary transmission
Comparative studies across different monetary regimes
21. Great Moderation and Structural Change
Papers on structural breaks in monetary relationships
Studies on changing nature of business cycles and monetary policy
Research on evolving monetary transmission mechanisms over time
Papers on regime changes in central banking
Emerging and Future Topics
22. Digital Finance and Fintech
Studies on how digital payments affect money demand and transmission
Research on cryptocurrency implications for monetary aggregates
Papers on fintech disruption of traditional money markets
Studies on big tech entry into financial services
23. Climate and Environmental Applications
Papers on green monetary policy and environmental transmission channels
Studies on climate risk and financial stability
Research on sustainable finance and monetary aggregates
Papers on transition risk in monetary transmission
Papers Relevant to Chen & Valcarcel (2021)
Chen, Zhengyang, and Victor J. Valcarcel. “Monetary transmission in money markets: The not-so-elusive missing piece of the puzzle.” Journal of Economic Dynamics and Control 131 (October 2021): 104214. https://doi.org/10.1016/j.jedc.2021.104214.
Foundational Monetary Policy VAR Literature
Christiano, L.J., Eichenbaum, M., & Evans, C.L. (1999). Monetary Policy Shocks: What Have We Learned and to What End? *Handbook of Macroeconomics*
This seminal paper established the standard recursive VAR approach for identifying monetary policy shocks using the federal funds rate, which Chen & Valcarcel directly challenge by showing persistent price puzzles in modern samples. The authors demonstrate that Christiano et al.’s commodity price solution to the price puzzle fails in post-1988 data, suggesting fundamental limitations of interest rate-based identification.
Bernanke, B.S., Boivin, J., & Eliasz, P. (2005). Measuring the Effects of Monetary Policy: A Factor-Augmented Vector Autoregressive (FAVAR) Approach. *Quarterly Journal of Economics*
Chen & Valcarcel adopt and extend Bernanke et al.’s FAVAR methodology using time-varying parameters, but fundamentally change the policy indicator from interest rates to Divisia monetary aggregates. This methodological foundation allows them to examine monetary transmission to disaggregated money markets while avoiding the curse of dimensionality.
Ramey, V.A. (2016). Macroeconomic Shocks and Their Propagation. *Handbook of Macroeconomics*
Ramey’s comprehensive survey of monetary policy shock identification provides the broader context for Chen & Valcarcel’s findings about persistent price puzzles in federal funds rate specifications. The authors’ work contributes to Ramey’s documented challenges in monetary VAR literature by proposing Divisia aggregates as a solution.
Price Puzzle Literature
Eichenbaum, M. (1992). Comments on Interpreting the Time Series Facts: The Effects of Monetary Policy. *European Economic Review*
This paper coined the term “price puzzle” that Chen & Valcarcel directly address throughout their study. Their work provides a definitive solution to this three-decade-old problem by replacing interest rate indicators with properly measured monetary aggregates.
Sims, C.A. (1992). Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy. *European Economic Review*
Sims’ influential work on monetary policy identification in VARs provides the theoretical foundation that Chen & Valcarcel build upon. The authors extend Sims’ framework by demonstrating that the choice of policy indicator (interest rates vs. money) fundamentally affects identification success.
Barakchian, S.M. & Crowe, C. (2013). Monetary Policy Matters: Evidence from New Shocks Data. *Journal of Monetary Economics*
Chen & Valcarcel’s findings strongly support Barakchian & Crowe’s documentation of persistent price puzzles in modern samples using federal funds rate identification. Both papers highlight the particular virulence of price puzzles in post-1980s data, though Chen & Valcarcel provide a solution through Divisia aggregates.
Monetary Aggregates and Divisia Literature
Barnett, W.A. (1980). Economic Monetary Aggregates: An Application of Index Number and Aggregation Theory. *Journal of Econometrics*
Barnett’s foundational work on Divisia monetary aggregates provides the theoretical basis for Chen & Valcarcel’s policy indicator choice. The authors demonstrate that Barnett’s superior aggregation methodology translates into superior monetary policy identification and transmission analysis.
Belongia, M.T. & Ireland, P.N. (2014). The Barnett Critique After Three Decades: A New Keynesian Analysis. *Journal of Econometrics*
This paper’s rehabilitation of monetary aggregates in New Keynesian frameworks directly supports Chen & Valcarcel’s empirical findings. Both papers argue that properly measured money provides superior information about monetary conditions compared to interest rates alone.
Belongia, M.T. & Ireland, P.N. (2015). Interest Rates and Money in the Measurement of Monetary Policy. *Journal of Business & Economic Statistics*
Chen & Valcarcel extend Belongia & Ireland’s theoretical arguments by providing comprehensive empirical evidence that Divisia aggregates resolve identification problems in monetary VARs. Both papers advocate for renewed focus on monetary quantities in policy analysis.
Time-Varying Parameter Methodologies
Primiceri, G.E. (2005). Time Varying Structural Vector Autoregressions and Monetary Policy. *Review of Economic Studies*
Chen & Valcarcel adopt Primiceri’s TVP-VAR methodology to investigate time variation in monetary transmission mechanisms. Their extension to include monetary aggregates reveals substantial changes in transmission following the 2007 financial crisis that would be missed in constant parameter models.
Cogley, T. & Sargent, T.J. (2005). Drifts and Volatilities: Monetary Policies and Outcomes in the Post WWII US. *Review of Economic Dynamics*
The time-varying approach in Chen & Valcarcel builds on Cogley & Sargent’s framework for analyzing evolving monetary relationships. Both papers document significant parameter instability in monetary models, though Chen & Valcarcel focus specifically on policy transmission mechanisms.
Boivin, J., Kiley, M.T., & Mishkin, F.S. (2010). How Has the Monetary Transmission Mechanism Evolved Over Time? *Handbook of Monetary Economics*
Chen & Valcarcel provide empirical support for Boivin et al.’s arguments about evolving monetary transmission by documenting structural changes in money market responses post-2008. Their findings complement this literature by showing how choice of policy indicator affects conclusions about transmission evolution.
Zero Lower Bound and Unconventional Policy
Wu, J.C. & Xia, F.D. (2016). Measuring the Macroeconomic Impact of Monetary Policy at the Zero Lower Bound. *Journal of Money, Credit and Banking*
Chen & Valcarcel use Wu & Xia’s shadow federal funds rate but find it produces persistent price puzzles, challenging its effectiveness for VAR identification. This creates tension between shadow rate approaches and VAR-based monetary analysis that their Divisia solution helps resolve.
Gertler, M. & Karadi, P. (2015). Monetary Policy Surprises, Credit Costs, and Economic Activity. *American Economic Journal: Macroeconomics*
While Gertler & Karadi focus on high-frequency identification of monetary surprises, Chen & Valcarcel’s findings suggest that even sophisticated interest rate measures may be problematic for VAR analysis. Both papers grapple with identification challenges in the post-crisis period.
Krishnamurthy, A. & Vissing-Jorgensen, A. (2011). The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy. *Brookings Papers on Economic Activity*
Chen & Valcarcel’s analysis of money market transmission during the QE period complements Krishnamurthy & Vissing-Jorgensen’s focus on interest rate channels. Their work provides the monetary quantity perspective on QE transmission that is largely absent from interest rate-focused studies.
Factor Models and High-Dimensional Analysis
Stock, J.H. & Watson, M.W. (2002). Forecasting Using Principal Components From a Large Number of Predictors. *Journal of the American Statistical Association*
Chen & Valcarcel’s FAVAR approach builds on Stock & Watson’s factor methodology to handle high-dimensional money market data. Their application demonstrates how factor methods can illuminate monetary transmission to specific financial market segments.
Koop, G. & Korobilis, D. (2014). A New Index of Financial Conditions. *European Economic Review*
Chen & Valcarcel adopt Koop & Korobilis’s TVP-FAVAR methodology, extending it to monetary policy analysis with Divisia aggregates. This methodological choice allows them to avoid the curse of dimensionality while investigating transmission to numerous money markets.
Money Demand and Financial Innovation
Friedman, B.M. & Kuttner, K.N. (1992). Money, Income, Prices, and Interest Rates. *American Economic Review*
Chen & Valcarcel’s findings support Friedman & Kuttner’s concerns about instability in monetary relationships, but suggest this instability may reflect measurement problems rather than fundamental breakdown. Their Divisia results indicate more stable relationships when money is properly measured.
Ireland, P.N. (2001). The Real Balance Effect. *NBER Working Paper*
While Ireland questioned the quantitative importance of real balance effects, Chen & Valcarcel demonstrate that properly measured monetary aggregates contain superior information for policy identification. Their work suggests money’s importance may lie in its information content rather than direct wealth effects.
Structural Breaks and Regime Changes
Clarida, R., Galí, J., & Gertler, M. (2000). Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory. *Quarterly Journal of Economics*
Chen & Valcarcel’s documentation of changed monetary transmission post-2008 relates to Clarida et al.’s analysis of monetary regime changes. Both papers investigate how shifts in Federal Reserve behavior affect macroeconomic relationships.
Lubik, T.A. & Schorfheide, F. (2004). Testing for Indeterminacy: An Application to U.S. Monetary Policy. *American Economic Review*
While Lubik & Schorfheide focus on policy rule estimation, Chen & Valcarcel’s findings about superior performance of monetary aggregates suggest alternative approaches to characterizing monetary policy stance. Both papers grapple with identification of monetary policy regimes.
Banking and Financial Markets
Kashyap, A.K. & Stein, J.C. (2000). What Do a Million Observations on Banks Say About the Transmission of Monetary Policy? *American Economic Review*
Chen & Valcarcel’s analysis of transmission to various deposit categories complements Kashyap & Stein’s bank lending channel research. Their money market findings provide the deposit side perspective on how monetary policy affects bank balance sheets.
Woodford, M. (2003). Interest and Prices: Foundations of a Theory of Monetary Policy. *Princeton University Press*
While Woodford’s influential framework largely excludes monetary aggregates, Chen & Valcarcel’s empirical findings challenge this theoretical choice. Their results suggest that Woodford’s interest rate-focused approach may miss important information contained in monetary quantities.
International Perspectives
Taylor, J.B. (1993). Discretion versus Policy Rules in Practice. *Carnegie-Rochester Conference Series on Public Policy*
Chen & Valcarcel’s findings about superior performance of monetary aggregates relate to Taylor’s rule literature by suggesting alternative ways to characterize systematic monetary policy. Their work implies that Taylor rules may be incomplete descriptions of policy transmission.
Romer, C.D. & Romer, D.H. (2004). A New Measure of Monetary Shocks: Derivation and Implications. *American Economic Review*
While Romer & Romer develop narrative identification of monetary shocks, Chen & Valcarcel’s VAR-based approach provides complementary evidence about transmission mechanisms. Both papers seek to improve identification of monetary policy effects, though through different methodologies.
Financial Innovation and Shadow Banking
Gorton, G. & Metrick, A. (2012). Securitized Banking and the Run on Repo. *Journal of Financial Economics*
Chen & Valcarcel’s analysis of repo market responses to monetary policy shocks directly relates to Gorton & Metrick’s work on repo markets as a form of money creation. Their findings about dramatic changes in repo market transmission post-2008 provide empirical support for arguments about the central role of repo in modern monetary systems.
Pozsar, Z. (2014). Shadow Banking: The Money View. *Office of Financial Research Working Paper*
Pozsar’s framework for understanding shadow banking as part of the monetary system aligns with Chen & Valcarcel’s inclusion of money market instruments in their transmission analysis. Both papers argue that traditional monetary aggregates miss important components of the modern money supply.
Adrian, T. & Shin, H.S. (2010). Liquidity and Leverage. *Journal of Financial Intermediation*
Chen & Valcarcel’s documentation of changing transmission to institutional money market funds and large time deposits complements Adrian & Shin’s analysis of how financial intermediaries amplify monetary shocks. Their money market findings provide micro-level evidence for balance sheet channel theories.
Duffie, D. (2010). The Failure Mechanics of Dealer Banks. *Journal of Economic Perspectives*
While Duffie focuses on dealer bank failures, Chen & Valcarcel’s analysis of commercial paper and repo market transmission provides empirical evidence about how monetary policy affects the funding markets that Duffie analyzes. Their post-crisis findings illuminate how policy transmission through dealer funding markets evolved.
Great Moderation and Structural Change
McConnell, M.M. & Perez-Quiros, G. (2000). Output Fluctuations in the United States: What Has Changed Since the Early 1980’s? *American Economic Review*
Chen & Valcarcel’s choice of 1988 as their sample start date reflects the structural changes documented by McConnell & Perez-Quiros, suggesting that monetary transmission mechanisms also shifted during the Great Moderation. Both papers identify the 1980s as a fundamental break point in macroeconomic relationships.
Stock, J.H. & Watson, M.W. (2007). Why Has U.S. Inflation Become Harder to Forecast? *Journal of Money, Credit and Banking*
Chen & Valcarcel’s findings about evolving monetary transmission complement Stock & Watson’s documentation of changing inflation dynamics. Their evidence that Divisia aggregates provide better policy identification may help explain some of the forecasting difficulties Stock & Watson identify.
Blanchard, O. & Simon, J. (2001). The Long and Large Decline in U.S. Output Volatility. *Brookings Papers on Economic Activity*
The structural changes in monetary transmission that Chen & Valcarcel document provide one potential explanation for the output volatility decline that Blanchard & Simon analyze. Their work suggests that improved monetary policy transmission (when properly measured) may have contributed to macroeconomic stabilization.
Galí, J. & Gambetti, L. (2009). On the Sources of the Great Moderation. *American Economic Journal: Macroeconomics*
Chen & Valcarcel’s time-varying analysis of monetary transmission relates directly to Galí & Gambetti’s investigation of changing shock transmission. Both papers use time-varying VARs to investigate evolving macroeconomic relationships, though Chen & Valcarcel focus specifically on monetary channels.
High-Frequency Identification and Market-Based Measures
Kuttner, K.N. (2001). Monetary Policy Surprises and Interest Rates: Evidence from the Fed Funds Futures Market. *Journal of Monetary Economics*
Chen & Valcarcel test whether including federal funds futures can resolve price puzzles in their VAR specifications, finding that it cannot. This challenges the effectiveness of Kuttner’s high-frequency approach when applied to VAR settings, suggesting fundamental limitations of interest rate-based identification.
Gürkaynak, R.S., Sack, B., & Swanson, E. (2005). The Sensitivity of Long-Term Interest Rates to Economic News. *American Economic Review*
While Gürkaynak et al. focus on high-frequency interest rate responses, Chen & Valcarcel’s VAR findings suggest that interest rate measures may be inadequate for understanding broader macroeconomic transmission. Their work implies that market-based measures capture only part of monetary transmission.
Cochrane, J.H. & Piazzesi, M. (2002). The Fed and Interest Rates—A High-Frequency Identification. *American Economic Review*
Chen & Valcarcel’s approach contrasts with Cochrane & Piazzesi’s high-frequency methodology by focusing on low-frequency VAR relationships. Their findings suggest that high-frequency interest rate identification may not translate effectively to VAR-based macroeconomic analysis.
Central Bank Communication and Forward Guidance
Bernanke, B.S., Reinhart, V.R., & Sack, B.P. (2004). Monetary Policy Alternatives at the Zero Bound: An Empirical Assessment. *Brookings Papers on Economic Activity*
Chen & Valcarcel’s analysis of post-2008 transmission changes relates to Bernanke et al.’s discussion of unconventional policy effectiveness. Their findings about enhanced transmission through Divisia aggregates provide empirical support for unconventional policy effectiveness when properly measured.
Campbell, J.R., Evans, C.L., Fisher, J.D., & Justiniano, A. (2012). Macroeconomic Effects of Federal Reserve Forward Guidance. *Brookings Papers on Economic Activity*
Chen & Valcarcel’s argument that increased Fed transparency may have reduced the information content of interest rate shocks relates directly to Campbell et al.’s analysis of forward guidance effects. Both papers suggest that Fed communication changes have altered traditional monetary transmission mechanisms.
Swanson, E.T. (2021). Measuring the Effects of Federal Reserve Forward Guidance and Large-Scale Asset Purchases on Yields. *Journal of Monetary Economics*
While Swanson focuses on yield curve effects, Chen & Valcarcel’s broader transmission analysis provides complementary evidence about how unconventional policies affect real variables. Their Divisia-based approach may capture transmission channels that pure interest rate analysis misses.
International Monetary Transmission
Dedola, L., Rivolta, G., & Stracca, L. (2017). If the Fed Sneezes, Who Catches a Cold? *Journal of International Economics*
Chen & Valcarcel’s findings about U.S. monetary transmission through money markets provide the domestic foundation for understanding international spillovers. Their work suggests that international transmission studies should consider monetary aggregates alongside interest rate channels.
Miranda-Agrippino, S. & Rey, H. (2020). U.S. Monetary Policy and the Global Financial Cycle. *Review of Economic Studies*
While Miranda-Agrippino & Rey focus on international capital flows, Chen & Valcarcel’s domestic money market analysis provides insights into the source mechanisms that drive global transmission. Their findings about money market transmission changes post-2008 may help explain evolving international spillovers.
Iacoviello, M. & Navarro, G. (2019). Foreign Effects of Higher U.S. Interest Rates. *Journal of International Money and Finance*
Chen & Valcarcel’s documentation of problematic U.S. interest rate identification has implications for Iacoviello & Navarro’s international analysis. If domestic interest rate shocks are poorly identified, this raises questions about international transmission studies based on similar identification.
DSGE Models and Theoretical Foundations
Smets, F. & Wouters, R. (2007). Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach. *American Economic Review*
Chen & Valcarcel’s empirical findings about superior performance of monetary aggregates challenge the theoretical foundations of DSGE models like Smets & Wouters that largely ignore monetary quantities. Their work suggests that DSGE models may be missing important information by focusing solely on interest rates.
Christiano, L.J., Eichenbaum, M., & Evans, C.L. (2005). Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy. *Journal of Political Economy*
While this DSGE model attempts to match VAR evidence, Chen & Valcarcel’s findings suggest the VAR evidence itself may be flawed when using interest rate identification. Their work implies that DSGE models should be estimated to match monetary aggregate-based VARs rather than interest rate-based ones.
Galí, J. (2015). Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework. *Princeton University Press*
Chen & Valcarcel’s empirical results challenge core assumptions of Galí’s New Keynesian framework about the primacy of interest rates in monetary transmission. Their findings suggest that the theoretical exclusion of monetary aggregates may be empirically costly.
Financial Frictions and Credit Channels
Bernanke, B.S. & Gertler, M. (1995). Inside the Black Box: The Credit Channel of Monetary Policy Transmission. *Journal of Economic Perspectives*
Chen & Valcarcel’s analysis of deposit and money market transmission provides empirical content for Bernanke & Gertler’s “black box” metaphor. Their findings about differential responses across deposit types and money markets illuminate specific mechanisms within the credit channel.
Kashyap, A.K., Stein, J.C., & Wilcox, D.W. (1993). Monetary Policy and Credit Conditions: Evidence from the Composition of External Finance. *American Economic Review*
Chen & Valcarcel’s documentation of commercial paper market responses to monetary shocks provides direct evidence for the external finance channel that Kashyap et al. theorize. Their time-varying analysis shows how this channel evolved following the 2007 financial crisis.
Jiménez, G., Ongena, S., Peydró, J.L., & Saurina, J. (2012). Credit Supply and Monetary Policy: Identifying the Bank Balance-Sheet Channel with Loan Applications. *American Economic Review*
While Jiménez et al. use micro banking data, Chen & Valcarcel’s macro analysis of deposit flows provides the aggregate counterpart to bank balance sheet effects. Their findings about savings deposit responses help explain the funding side of the bank lending channel.
Inflation Targeting and Monetary Frameworks
Bernanke, B.S. & Mishkin, F.S. (1997). Inflation Targeting: A New Framework for Monetary Policy? *Journal of Economic Perspectives*
Chen & Valcarcel’s findings about superior information content in monetary aggregates raise questions about inflation targeting frameworks that largely ignore monetary quantities. Their work suggests that central banks may be discarding useful information by focusing solely on interest rate instruments.
Svensson, L.E. (1997). Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets. *European Economic Review*
While Svensson advocates forward-looking inflation targeting, Chen & Valcarcel’s results suggest that monetary aggregates may contain superior information for policy assessment. Their findings imply that inflation targeting frameworks could benefit from incorporating monetary aggregate information.
Walsh, C.E. (2017). Monetary Theory and Policy. *MIT Press*
Chen & Valcarcel’s empirical findings challenge many assumptions in Walsh’s comprehensive textbook treatment of monetary policy. Their work suggests that the theoretical marginalization of monetary aggregates in modern monetary economics may be empirically unjustified.
Zhengyang (Robin) Chen
Assistant Professor in Economics
My research interests include Macroeconomics and Monetary Economics, Time Series Analysis and Financial Markets.