Monetary policy also has short-run effects
Professor Vasco Carvalho is a co-author of a paper published in VoxEU, which examines the short-term effects of changes to monetary tightening, and finds it does have notable impacts in the short term.
Prof. Carvalho has picked up on Milton Friedman’s famous dictum concerning ‘long and variable lags’, that monetary actions affect economic conditions only after a lag that is both long and variable, for example with a rise in interest rates.
However, in the new research Carvalho and Professor Corsetti who was previously in the Faculty, plus co-authors Gergely Buda, Joao Duarte, Stephen Hansen, Afonso Moura, Alvaro Ortiz, Tomasa Rodrigo, José Rodríguez Mora and Guilherme Silva debate that monetary policy’s identified long lags do not rule out it also having short-run effects.
Among academics, decades of research have shown that the transmission mechanism of monetary policy is complex and plays out over multiple channels that unfold at medium and long horizons.
