TY  - JOUR
AU  - Atkeson, Andrew
AU  - Kehoe, Patrick J
TI  - On the Need for a New Approach to Analyzing Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 14260
PY  - 2008
Y2  - August 2008
DO  - 10.3386/w14260
UR  - http://www.nber.org/papers/w14260
L1  - http://www.nber.org/papers/w14260.pdf
N1  - Author contact info:
Andrew Atkeson
Bunche Hall 9381
Department of Economics
UCLA
Box 951477
Los Angeles, CA  90095-1477
Tel: 866/312-9770
Fax: 310/825-9528
E-Mail: andy@atkeson.net

Patrick J. Kehoe
Department of Economics
Stanford University
579 Jane Stanford Way
Stanford, CA 94305
E-Mail: patrickjameskehoe@gmail.com
M1  - published as Andrew Atkeson, Patrick J. Kehoe. "On the Need for a New Approach to Analyzing Monetary Policy," in Daron Acemoglu, Kenneth Rogoff and Michael Woodford, editors, "NBER Macroeconomics Annual 2008, Volume 23" University of Chicago Press (2009)

AB  - We present a pricing kernel that summarizes well the main features of the dynamics of interest rates and risk in postwar U.S. data and use it to uncover how the pricing kernel has moved with the short rate in this data. Our findings imply that standard monetary models miss an essential link between the central bank instrument and the economic activity that monetary policy is intended to affect and thus we call for a new approach to monetary policy analysis. We sketch a new approach using an economic model based on our pricing kernel. The model incorporates the key relationships between policy and risk movements in an unconventional way: the central bank's policy changes are viewed as primarily intended to compensate for exogenous business cycle fluctuations in risk which threaten to push inflation off target. This model, while an improvement on standard models, is considered just a starting point for their revision. It leads to critical questions that researchers need to answer as they continue to revise their approach to monetary policy analysis.
ER  -