Technology Shocks and Monetary Policy: Revisiting the Fed's Performance

Would the U.S. economy's dynamic response to permanent technology shocks have been different from the actual responses if monetary authorities' systematic response to these shocks had been optimal? To answer this question, we characterize the dynamic effects of permanent technology shocks and the way in which U.S. monetary authorities reacted to these shocks over the sample 1955(1)-2002(4) using a structural VAR. A sticky price-sticky wage model is developed and estimated to reproduce these responses. We then formally compare these responses with the outcome of the optimal monetary policy.