THE EFFECTS OF MONETARY-POLICY SHOCKS - EVIDENCE FROM THE FLOW OF FUNDS

This paper assesses the impact of a monetary policy shock on the U.S. economy. Our measures of contractionary monetary policy shocks are ass ociated with (i) a fall in various monetary aggregates and a rise in t he federal funds rate, (ii) declines in different measures of real act ivity, (iii) sharp declines in commodity prices and a delayed decline in the GDP price deflator. In addition, net funds raised by the busine ss sector increases for roughly a year, after which it falls. Finally, we find that households do not adjust their financial assets and liab ilities for several quarters after a monetary shock.