This paper develops a measure of U.S. monetary policy shocks for the period 1969 -1996 The accuracy of estimates of the effects of monetary policy depends crucially on the validity of the measure of monetary policy that is used. Use of an inappropriate measure may obscure a relationship between monetary policy and other economic variables that actually exists, or create the appearance of a relationship where there is no true causal link. For this reason, this paper derives a new measure of monetary policy shocks that is free from some key deficiencies of previous measures. The new measure yields estimates of the impact of monetary policy on both real and nominal variables that are stronger and faster than those obtained using conventional indicators.Conventional measures of monetary policy have some obvious flaws. One is the likelihood of endogenous movements. The money supply, for example, tends to rise in good times because the money multiplier rises. Even the federal funds rate, which has become the standard indicator of monetary actions in studies of the effects of monetary policy, moves a great deal from day to day for reasons unrelated to monetary policy. And, in eras when the Federal Reserve targeted the funds rate less closely than it has in the Greenspan era, the funds rate often moved endogenously with changes in economic conditions. Such endogenous movements may lead to biased estimates of the effects of monetary policy. For example, the tendency of the funds rate to rise endogenously with economic activity may cause researchers to underestimate the negative impact of increases in interest rates on real economic variables.Another problem with conventional measures is that they almost surely contain anticipatory movements. To avoid the problem of endogeneity, one might use as the measure of policy the Federal Reserve's target for some variable, such as the funds rate or nonborrowed reserves. However, movements in such target series are surely not random. The Federal Reserve invests a huge amount of resources in forecasting the likely behavior of output and prices. As a result, movements in its target series are often responses to information about future economic developments. For example, the Federal Reserve typically cuts the target funds rate if it sees signs that a recession is likely. In such a situation, output is unlikely to rise in the wake of the interest rate cut even if the monetary policy action is having a stimulative effect. If anticipatory countercyclical actions are common, a regression may again fail to find a * Department of Economics, University of California, Berkeley, CA 94720, and National Bureau of Economic Research (e-mail: cromer@econ.berkeley.edu; dromer@ econ.berkeley.edu). We are grateful to Normand Bernard for providing data and Federal Reserve records, to Marjorie Flavin, Jeffrey Fuhrer, Charles Jones, Janet Yellen, and the referees for helpful comments and suggestions, and to the National Science Foundation for financial support. 1055negative relationship between increas...

This paper investigates the impact of tax changes on economic activity. We use the narrative record, such as presidential speeches and Congressional reports, to identify the size, timing, and principal motivation for all major postwar tax policy actions. This analysis allows us to separate legislated changes into those taken for reasons related to prospective economic conditions and those taken for more exogenous reasons. The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. (JEL E32, E62, H20, N12)

This paper investigates the impact of changes in the level of taxation on economic activity. We use the narrative record --presidential speeches, executive-branch documents, and Congressional reports --to identify the size, timing, and principal motivation for all major postwar tax policy actions. This narrative analysis allows us to separate revenue changes resulting from legislation from changes occurring for other reasons. It also allows us to further separate legislated changes into those taken for reasons related to prospective economic conditions, such as countercyclical actions and tax changes tied to changes in government spending, and those taken for more exogenous reasons, such as to reduce an inherited budget deficit or to promote long-run growth. We then examine the behavior of output following these more exogenous legislated changes. The resulting estimates indicate that tax increases are highly contractionary. The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes. The large effect stems in considerable part from a powerful negative effect of tax increases on investment. We also find that legislated tax increases designed to reduce a persistent budget deficit appear to have much smaller output costs than other tax increases.

This paper tests for the existence of asymmetric information between the Federal Reserve and the public by examining Federal Reserve and commercial inflation forecasts. It demonstrates that the Federal Reserve has considerable information about inflation beyond what is known to commercial forecasters. It also shows that monetary-policy actions provide signals of the Federal Reserve's information and that commercial forecasters modify their forecasts in response to those signals. These findings may explain why long-term interest rates typically rise in response to shifts to tighter monetary policy.

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