The long-run effects of monetary policy
Sanjay R. Singh
Does monetary policy have persistent effects on the productive capacity of the economy? Yes, we find that such effects are economically and statistically significant and last for over a decade based on: (1) identification of exogenous monetary policy fluctuations using the trilemma of international finance; (2) merged data from two new international historical cross-country databases reaching back to the nineteenth century; and (3) econometric methods robust to long-horizon inconsistent estimates. Notably, the capital stock and total factor productivity (TFP) exhibit strong hysteresis, while labor does not. Allowing for asymmetry, we find these effects are present when interest rates tighten, but not when they loosen. There is no free lunch: the monetary authority can destroy, but cannot expand the productive capacity of the economy.