TY - JOUR AU - Christiano,Lawrence J. AU - Eichenbaum,Martin AU - Evans,Charles TI - The Effects of Monetary Policy Shocks: Some Evidence from the Flow of Funds JF - National Bureau of Economic Research Working Paper Series VL - No. 4699 PY - 1994 Y2 - April 1994 UR - http://www.nber.org/papers/w4699 L1 - http://www.nber.org/papers/w4699.pdf N1 - Author contact info: Lawrence Christiano Department of Economics Northwestern University 2001 Sheridan Road Evanston, IL 60208 Tel: 847/491-8231 Fax: 847/491-7001 E-Mail: l-christiano@northwestern.edu Martin S. Eichenbaum Department of Economics Northwestern University 2003 Sheridan Road Evanston, IL 60208 Tel: 847/491-8232 Fax: 847/491-7001 E-Mail: eich@northwestern.edu Charles Evans Federal Reserve Bank of Chicago 2nd floor 230 S. LaSalle Street Chicago, IL 60604 Tel: 312-322-5001 E-Mail: charles.l.evans@chi.frb.org M2 - featured in NBER digest on 1995-01-01 AB - This paper uses the Flow of Funds accounts to assess the impact of a monetary policy shock on the borrowing and lending activities of different sectors of the economy. Our measures of contractionary monetary policy shocks have the following properties: (i) they are associated with a fall in nonborrowed reserves, total reserves, M1, the Federal Reserves' holdings of government securities and a rise in the federal funds rate, (ii) they lead to persistent declines in real GNP, employment, retail sales and nonfinancial corporate profits as well as increases in unemployment and manufacturing inventories, (iii) they generate sharp, persistent declines in commodity prices and (iv) the GDP price deflator does not respond to them for roughly a year. After that the GDP price deflator declines. Our major findings regarding the borrowing activities of different sectors can be summarized as follows. First, following a contractionary shock to monetary policy, net funds raised by the business sector increases for roughly a year. Thereafter, as the recession induced by the policy shock gains momentum, net funds raised by the business sector begins to fall. This pattern is not captured by existing monetary business cycle models. Second, we cannot reject the view that households do not adjust their financial assets and liabilities for several quarters after a monetary shock. This is consistent with a key assumption of several recent monetary business cycle models. ER -