A MARKET-BASED TEST OF THE EFFECT OF MONETARY POLICY.

This paper tests the rational expectations-natural rate hypothesis without basing expectations on time series estimates. Instead, market-based data are used. Unexpected money supply changes are determined via the Fisher Effect and the Quantity Equation. This introduces errors of a very different kind than the traditional approach, and yet the results are remarkably similar to those generated using time series estimates. Unanticipated money shocks are shown to exert a significant but only short-run effect on real output, suggesting only a short-run Phillips curve trade-off. Anticipated money growth appears to have no effect on real output. [ABSTRACT FROM AUTHOR]