John H. Cochrane | Macro Paper Warehouse

[What Ends Recessions?]: Comment

Commenting on Christina and David Romer’s claim that active Federal Reserve policy ended postwar recessions, Cochrane argues that their historical narrative cannot distinguish a Fed that reacts to output from a Fed that causes it, that their regression-based policy multipliers are not separately identified from the Fed’s own feedback rule without an explicit, defended monetary theory, and that the size, permanence, and delay of their estimated multipliers do not match any known account of how money affects output. Cochrane places the Romers’ project squarely in the line of Friedman-Schwartz-style historical monetary analysis and revives the identification critiques Tobin and Kareken-Solow raised against that method thirty years earlier: a history of Fed officials perceiving recessions and lowering rates documents that the Fed reacted systematically to output and inflation, but says nothing about whether output reacted to the Fed, since predictable (“systematic”) policy actions are exactly the kind of correlation with dubious causal content that VAR methodology was built to sidestep. Working through the underlying regression algebra, Cochrane shows the Romers’ OLS and instrumental-variables “policy multiplier” estimates are observationally equivalent to the negative of the Fed’s own feedback rule unless one assumes, as they implicitly do, that anticipated and unanticipated monetary policy have identical real effects – an assumption he argues is hard to reconcile with the apparent neutrality of announced disinflations and the ends of hyperinflations. He further argues the estimated multipliers are implausibly large (requiring investment responses far outside what the investment literature supports), permanent, and delayed in a way no theory of monetary transmission predicts, and that a simple look at how little nondurables-and-services consumption moves across four recessions suggests households already expect recessions to be short-lived on their own, undercutting the premise that policy-induced “ending” is even needed. Cochrane closes by faulting the paper for engaging none of the intervening thirty years of VAR and monetary-theory literature that grew directly out of the very identification problems it re-encounters, while praising the Romers’ FOMC-minutes evidence as a potentially valuable input to resolving the Fed’s own reaction function.

A Frictionless View of U.S. Inflation

Cochrane asks whether U.S. postwar inflation can be understood using a “frictionless” fiscal theory of the price level – in which the price level is pinned down by the government’s intertemporal budget constraint rather than by a transactions demand for money – and argues that once the primary surplus is modeled as reacting to recessions by promising higher future surpluses, the fiscal theory can rationalize otherwise puzzling correlations, such as high government debt coinciding with low inflation, even though the theory has no testable implications of its own for the joint behavior of debt, surpluses, and prices. Motivated by financial innovation’s erosion of any well-defined transactions-facilitating monetary aggregate, and by the quantity theory’s poor track record explaining postwar U.S. inflation, Cochrane exposits the fiscal theory in a frictionless setting: the identity that nominal debt divided by the price level equals the present value of real primary surpluses can, under a “non-Ricardian” fiscal policy, determine the price level exactly as the quantity equation does in monetary theory, and this fiscal determination is immune to financial innovation since it depends on total government debt rather than on any liquid, transaction-facilitating asset. Cochrane clarifies the definition of “Ricardian” regimes (policies under which the government’s budget identity holds for any conceivable price level, rendering the constraint powerless to pin one down) using a wheat-standard thought experiment, and is candid that the fiscal theory per se has no testable implications distinguishing it from a monetary story, since the same accounting identity linking debt, surpluses, and returns holds regardless of which variable is doing the adjusting. Building a new dataset on the maturity structure of U.S. federal debt, Cochrane documents correlations that look backward for a naive fiscal story – the largest primary deficit occurred in 1975 alongside the onset of serious inflation, while the 1980s saw dramatically rising debt with falling inflation – and resolves the apparent puzzle by showing that once the surplus is modeled as a higher-order process in which today’s low surplus (extra debt sold in a recession) signals higher future surpluses, the fiscal theory can rationalize why debt-financed deficits smooth rather than destabilize inflation. He closes by noting that fiscal policy already accounts for much of the observed price-level smoothing in the postwar data, and that both larger debt-financed smoothing and a naive money-growth rule would have performed worse.

Comments on "A New Measure of Monetary Shocks: Derivation and Implications"

These are John Cochrane’s discussant remarks, delivered July 17, 2004 at an NBER Economic Fluctuations and Growth meeting, on Christina Romer and David Romer’s “A New Measure of Monetary Shocks: Derivation and Implications” (published in the American Economic Review later that year). Cochrane opens by declaring he wants to argue the paper is “much better and deeper than the authors think it is,” identifying its two key innovations as extending the Fed’s intended (target) funds rate series back in time using historical “intentions” data, and, more importantly, establishing via narrative evidence that Federal Reserve staff Greenbook forecasts function as a “sufficient statistic” for the Fed’s information set at the time of each policy decision. Cochrane shows this sufficient-statistic property lets both halves of Romer-Romer’s procedure be radically simplified: identifying a valid policy shock requires only that it be orthogonal to the Fed’s own output forecast (not to price, exchange-rate, or other forecasts, since only reverse causality running through output needs to be purged), and once such a shock is in hand, the output or price response can be read directly off a sequence of single regressions rather than a full dynamic simulation with Monte Carlo standard errors. Re-estimating with his simplified shocks, Cochrane obtains essentially the same headline result as Romer-Romer – a 100-basis-point tightening produces a 6-8% decline in output peaking around 30 months out, with statistical significance only modestly above conventional thresholds (t-statistics “just above 2”) – alongside a “price puzzle” that he argues is not legitimately fixable by adding commodity prices to the shock regression, since the historical FOMC record shows no narrative evidence that the Fed actually responded to commodity-price movements in the way that fix presumes. He flags the response’s long delay and the near-total absence of any price response as jointly troubling for monetary theory, since most theories tie the two together. In a preliminary extension, Cochrane recomputes the output effect of a one-time, one-month target increase not followed by the Fed’s usual further tightening, and finds it roughly a tenth the size and considerably shorter-lived than the standard “full path” response – suggesting that whether anticipated policy actions matter is, in his view, at least as consequential a modeling choice as any other in this literature. He closes by suggesting the field’s next step should be estimating the Fed’s systematic policy rule directly (via narrative methods, since Fed statements arguably already summarize the rule) rather than continuing to refine shock-and-response estimates, and offers a conjecture that ordinary regression evidence cannot in principle distinguish a determinate (Taylor-rule-consistent) policy regime from an indeterminate one, because such regressions can only recover the stable root of the model’s dynamics, not the off-equilibrium explosive threats that actually enforce determinacy.

Determinacy and Identification with Taylor Rules

This paper attacks the standard new-Keynesian explanation for how an interest-rate rule of the Taylor type determines the price level. The textbook story holds that because the Federal Reserve raises nominal rates more than one-for-one with inflation, the resulting “active” policy rules out the indeterminacy that plagues a fixed interest-rate peg and supplies the economy’s missing “nominal anchor.” Cochrane shows this account is incomplete on its own terms: within the standard model, the Taylor rule leaves a continuum of valid equilibria, indexed by an arbitrary initial inflation rate, all but one of which involve inflation or deflation that “explodes” or eventually leaves a neighborhood of target; the literature selects the single “locally bounded” path by simply disallowing the others, but the only economic device available to disallow them – an appeal to the consumer’s transversality condition – rules out explosive real quantities, not explosive nominal ones, so nothing in the model’s actual economics justifies the selection. Working through the specific proposals in the literature that try to trim these alternative equilibria by describing policies the government would follow if inflation or deflation began to run away, Cochrane argues that every version he examines either fails to rule out the unwanted path after all, or succeeds only by describing a policy under which no equilibrium at all could form – jointly infeasible commitments (for instance, pegging a commodity price while also enforcing an incompatible money-supply limit) that amount to a government threat to “blow up the economy,” which he argues is not a plausible description of how governments actually behave or of what people currently believe they would do. He then shows that even granting the theory’s own equilibrium-selection logic, the Taylor rule’s policy-response coefficient cannot be identified from time-series regressions of interest rates on inflation, because in the unique bounded equilibrium the “right-hand” variable is, by construction, a deterministic function of the unobserved policy disturbance itself, so such a regression recovers only the disturbance’s own serial-correlation parameter rather than the structural policy coefficient – undermining the central empirical claim, associated especially with Clarida, Galí, and Gertler (2000), that a measured shift in this coefficient around 1980 explains the end of 1970s U.S. inflation. Cochrane closes by pointing to a specific alternative: a “non-Ricardian” or “active fiscal, passive money” regime, in which the government-debt valuation equation, not the Taylor rule, pins down the price level directly, a mechanism that requires no equilibrium-trimming threats, remains fully consistent with the Fed appearing to follow a Taylor rule empirically, and is not itself the target of the paper’s critique of new-Keynesian modeling more broadly, since it retains the same forward-looking IS and pricing equations.

Long-Term Debt and Optimal Policy in the Fiscal Theory of the Price Level

This paper extends the fiscal theory of the price level – under which the price level equalizes the real value of nominal government debt to the present value of expected future real primary surpluses – from the standard one-period-debt case to an economy with a full maturity structure of long-term government debt, and shows the extension changes the theory’s predictions substantially. With only short-term debt, bad news about the present value of future surpluses must raise the price level immediately, because the nominal quantity of debt is predetermined; with long-term debt outstanding, that same news can instead be absorbed by a fall in long-term bond prices, so the price-level response can be postponed, smoothed, or split between the present and future depending entirely on the maturity structure – Cochrane derives the sharp special case in which, with a fixed, unchanging maturity structure, “prices are determined by bonds that fall due at each date divided by that date’s surplus,” so a shock to future deficits has no effect at all on today’s price level. He shows debt sales, not just surplus shocks, can move the price level too, but only if long-term debt is outstanding: new long-term issuance “dilutes” existing long bonds as claims on a fixed stream of future resources, letting the government lower today’s price level and raise revenue today at the cost of higher inflation whenever that new debt matures, a channel entirely absent when the government only rolls over short-term debt. Building on this apparatus, Cochrane solves for the debt-management policies that minimize the variance of inflation, finding that a short maturity structure is preferable when surpluses are transitory (so their present value moves less than the surplus itself), while long maturity structures dominate when surpluses build persistently after a shock, and that active, state-contingent adjustment of long-term debt sales lets the government further smooth a given fiscal shock by trading a lower price level today for a higher one later. Finally, Cochrane uses this optimal-policy framework to resolve an apparent empirical puzzle for the fiscal theory: naive comparative statics predict the real value of government debt should rise together with the surplus, but U.S. data show the opposite – high surpluses pay down debt – a pattern he shows emerges naturally if the government responds to fiscal shocks by borrowing and promising to raise future surpluses (the strategy that minimizes inflation volatility) rather than by inflating away existing debt or by rearranging debt maturities with no accompanying fiscal commitment, and he notes that shifting the optimization objective from price-level variance to inflation variance instead produces much smoother inflation at the cost of a unit root in the price level, a pattern he connects to the actual stabilization of U.S. inflation after the gold standard was abandoned.

Money as stock

This paper defends the fiscal theory of the price level against the theoretical objection that it requires the government to violate its own intertemporal budget constraint. Cochrane’s core move is an analogy: nominal government debt, including the monetary base, is a residual claim on the government’s future primary surpluses, exactly as private stock is a residual claim on a firm’s future profits, so the government-debt valuation equation (“nominal debt over the price level equals the present value of future surpluses”) is a market-clearing valuation condition, not a constraint the government must satisfy at every conceivable price level. He demonstrates the point with the currency-reform example: a government can double the stock of nominal debt while leaving future real surpluses unchanged, exactly as a firm can split its stock without altering future earnings, and in both cases everyone understands the resulting security’s price will simply halve – a response that would be impossible if the valuation equation were genuinely a budget constraint linking debt issuance to surpluses. To make the argument rigorous rather than merely analogical, Cochrane builds a fully specified, standard Walrasian cash-in-advance economy with one modification – the securities market reopens at the end of each day, letting households convert any unwanted end-of-day cash back into interest-bearing bonds – so that money demand falls to exactly zero, and shows by explicit construction that the government-debt valuation equation alone, with no money demand and no monetary friction whatsoever, can still determine a unique, finite, positive equilibrium price level, extending naturally to a fully cashless economy in which maturing government debt itself serves as the medium of exchange. He then works through, mechanically, exactly what the government does at off-equilibrium prices – redeeming maturing debt for cash, accepting cash for tax payments, auctioning new debt for cash – to show these commitments can be honored at any price path without forcing the government into a “Ricardian” policy of adjusting surpluses to whatever price level is announced, and that this logic depends critically on debt being nominal rather than real, indexed, or foreign-currency-denominated: only nominal debt can behave like equity. Along the way he addresses a series of standing objections – whether the theory is simply Sargent and Wallace’s (1981) “unpleasant monetarist arithmetic” restated (it is not, because that paper’s mechanism runs entirely through seigniorage on indexed debt, while the fiscal theory works with nominal debt and no seigniorage at all), whether historical evidence of stable money-income relationships refutes the theory (it does not, because a fiscal regime still has a money-demand equation, just one that determines the quantity rather than the price level), and whether allowing the government to violate a “budget constraint” opens the door to unlimited deficits (it does not, since cutting surpluses ex post simply devalues outstanding debt, an act with its own real costs analogous to default) – while explicitly cautioning, via the same stock analogy, that a valuation-based theory of the price level is likely to be just as hard to test decisively against short-run data as stock-price theories are against short-run earnings news.

Permanent and Transitory Components of GNP and Stock Prices

Using simple two-variable autoregressions of consumption and GNP, and of dividends and stock prices, Cochrane shows that a shock to GNP (or to stock prices) that leaves consumption (or dividends) unchanged is almost entirely transitory and economically large, so that consumption growth’s near-random-walk behavior lets it serve as a measure of the “permanent” trend against which GNP’s substantial cyclical component can be measured. Motivated by a literature finding little or no mean-reversion in postwar U.S. GNP using purely univariate techniques, Cochrane argues the missing ingredient is a second variable that forecasts long-horizon GNP growth better than GNP’s own lags. Because consumption and GNP are cointegrated (their ratio is stable over long periods) while consumption itself is close to a random walk, the lagged consumption/GNP ratio is a far more powerful predictor of future GNP growth than lagged GNP growth is by itself, so a bivariate VAR that orthogonalizes with consumption ordered first isolates a GNP shock – a movement in GNP with no contemporaneous change in consumption – that turns out to be almost completely transitory, accounting for 70-80 percent of the variance of GNP growth and 85-89 percent of one-step-ahead forecast-error variance. He shows the identical pattern holds for annual dividends and stock prices on the CRSP value-weighted NYSE portfolio: a price shock orthogonal to dividends is transitory and accounts for 57 percent of the variance of stock returns, while dividends behave like a random walk, mirroring the GNP/consumption result with prices and dividends in place of GNP and consumption. Cochrane interprets both results through simple present-value logic – the permanent-income hypothesis for consumption and GNP, and a present-value model in which managers smooth dividends toward discounted earnings for prices and dividends – and closes by correcting the natural but incorrect analogy between the two systems: because expected stock returns are not constant, it is dividends, not prices, that play the “permanent income” role, so “dividends equal ‘permanent earnings,’ not…prices equal ‘permanent dividends.’”

Shocks

Cochrane surveys the empirical evidence for the leading candidate shocks behind postwar U.S. business cycles – monetary policy, technology, oil prices, and credit – and concludes that none of them robustly accounts for the bulk of output fluctuations, while unforecastable movements in endogenous variables like consumption and output themselves explain a large and comparatively stable 50-70% of output variation. Working mostly through VARs, he shows for monetary shocks that estimated contributions to output variance range from as high as 82% in simple specifications down to under 10% once more “level” variables (consumption, hours), alternative orderings, and long-run restrictions are imposed, with virtually no explanatory power at horizons under a year; he argues the largest credible estimate is around 15-25% at a two-to-three-year horizon, tenuous even then. For technology shocks, Prescott’s famous calculation that 70% of output variance is technology-driven proves to be extremely sensitive to sampling error, the choice of statistic (variance decomposition versus long-horizon forecastability versus Beveridge-Nelson-detrended variance), and the production-function specification, with several re-calculations – inspired by Blanchard-Quah, Rotemberg-Woodford, and Christiano – pushing the figure down toward a small fraction of a percent; the concept of a “technology shock” is also shown, following Hansen and Prescott’s own broadening of the term, to risk becoming vacuous, standing in for essentially any distortion that lowers measured output given capital and labor. Oil-price and credit shocks receive briefer treatment and are found quantitatively too small (each explaining well under 20% of output variance in Cochrane’s VARs) despite genuine, if modest, supporting descriptive evidence. Faced with this shortfall, Cochrane examines whether unobservable “consumption” or “news” shocks – information individual agents have about their own prospects that, aggregated, forecasts future aggregate activity – can generate genuine business-cycle dynamics; he shows that a standard real-business-cycle model does not naturally produce consumption-led downturns from good news (news of future productivity growth instead triggers an immediate consumption rise and a decline in current output and labor), but that adding an explicit persistent news-shock process, or feeding VAR-based technology forecasts through the model, can reproduce the data’s characteristic transitory-output, forecastable-growth pattern. He closes by noting that if this news-shock view is correct, economists may remain permanently unable to name the true underlying causes of business cycle fluctuations.

The Fed and Interest Rates—A High-Frequency Identification

This 2002 American Economic Review Papers and Proceedings essay by John Cochrane and Monika Piazzesi proposes a high-frequency alternative to monthly-VAR identification of monetary policy shocks, built from daily interest-rate movements around actual Federal Open Market Committee target-change dates rather than from orthogonalized VAR residuals. Following Piazzesi (2001), they construct two shock measures that are zero in any month without a target change: a “target shock” (the change in a given yield from two days before to one day after a target change, regressed on the target-rate change itself) and a “Eurodollar shock” (the change in the one-month Eurodollar rate over the same window). Using daily U.S. interest-rate data and monthly nonfarm employment, CPI, and commodity-price data over 1984-2001, they estimate two regressions on actual target-change dates (Table 1): the target-shock regression (Panel A) finds coefficients ranging from 0.52 (t=9.1) at the one-month Eurodollar rate down to just 0.19 — 19 basis points (t=3.5) — at ten years; the separate Eurodollar-shock regression (Panel B) fits much better (R-squared as high as 0.87 at three months) and is the source of the paper’s “startling” headline figures — a 1-percent unexpected target change moving Treasury yields by 60-70 basis points from three months to three years and by 52 basis points even at ten years. This produces a “level” effect on the yield curve — all maturities moving together — in sharp contrast to the “slope” effect (short rates moving, long rates barely responding) found using monthly Christiano-Eichenbaum-Evans (CEE, 1996) VAR shocks. A separate forecasting regression (Table 2, 1984-2001, R-squared 0.64) shows Fed target changes are much better predicted by long-term rates than short rates — the two-year rate (b=0.87, t=6.7) and five-year rate (b=-0.87, t=-3.5) dominate — while an earlier, broader version of that regression that included all yields (R-squared 0.66, before variables with small t-statistics were dropped to reach the final Table 2 specification) found the one-month rate contributing almost nothing (b=-0.06, t=-0.8); this pattern implies the Fed reacts to market-embedded inflation expectations and to the yield-curve slope’s real-activity signal, consistent with (but outperforming) a Taylor rule. Two further findings complicate the identification: employment rises, rather than falls, following a high-frequency contractionary shock (versus a slow decline under CEE shocks), a difference the authors trace to how each measure classifies the 1979-1982 episode; and neither shock measure shows a statistically significant inflation decline, with the target-shock measure instead showing a large but “dubiously significant” price-puzzle-like increase. Dynamically, all interest rates keep rising for two years after a shock under the high-frequency measures — the ten-year rate rises 0.8 percentage points versus only 0.2 for the CEE shock — a pattern the authors call “troubling” because it runs against the standard intuition that tight policy lowers long-run inflation expectations and hence long rates. The paper’s own tentative conclusion is that because the Fed’s actions are so often forecastable responses to market information, “perhaps there are no true shocks,” and results throughout are described as preliminary, based on a small number of genuine surprises, and not resting on formal statistical inference beyond the reported coefficients and standard errors.

The Return of the Liquidity Effect: A Study of the Short-Run Relation Between Money Growth and Interest Rates

This paper asks whether short-run co-movements between money growth and interest rates reflect the traditional “liquidity effect” – money growth temporarily lowers real and nominal rates before eventually raising inflation – or the competing “anticipated inflation effect,” in which money growth signals future inflation and raises nominal rates with no offsetting decline in real rates. The two views make opposite predictions for the sign of the short-run correlation between money growth and interest rates (negative versus positive), which Cochrane tests using weekly U.S. M1, three-month Treasury-bill, and 20-year government bond data. He restricts the sample to the Federal Reserve’s October 1979-November 1982 nonborrowed-reserve-targeting episode specifically because, outside that period, the Fed’s active smoothing of interest rates creates reverse-causality (simultaneous-equations) bias in any regression of rates on money growth. To isolate the short-run relationship without needing to estimate the full long-run-plus-short-run-plus-noise relation between the series, he applies two-sided band-pass (spectral-window) filters that pass only cycles in a chosen frequency band – for example 12-26 or 26-52 weeks – generalizing the low-pass-filter approach Lucas (1980) and Summers (1983) had used to study long-run monetary neutrality and the long-run Fisher effect. Regressing filtered interest rates on filtered money growth across several such windows, Cochrane finds a consistently negative correlation for the three-month bill rate and, more surprisingly, for the 20-year bond rate as well, which he interprets as the liquidity effect dominating the anticipated-inflation effect at these short-run frequencies; a Geweke-style feedback test does not reject the absence of reverse causation from interest rates to money growth within the studied windows. The same negative correlation is largely absent when the same method is applied to the surrounding 1976-79 and 1982-86 subsamples, consistent with the finding depending on the Fed’s reduced interest-rate smoothing during the targeting experiment specifically. Cochrane reads the result as consistent with money-growth changes being largely unanticipated, money growth being a poor predictor of its own future path, and inflation following money growth only with a long lag, while explicitly cautioning that the reduced-form correlation documents the existence of a liquidity effect without quantifying its structural magnitude or duration.

Understanding policy in the great recession: Some unpleasant fiscal arithmetic

This paper uses the government-debt valuation equation – the requirement that the real value of outstanding money plus nominal government debt equal the present value of expected future primary surpluses – together with a money-demand equation, to interpret U.S. fiscal and monetary policy during and after the 2008-2009 financial crisis and to think through the possible paths to inflation or deflation that follow it. Cochrane argues that the depth of the 2008-2009 recession is best understood not as a shortage of money relative to money demand, but as a “flight to quality”: a surge in demand for all government debt, at the expense of private debt and of goods and services, corresponding in the fiscal equation to a fall in the discount rate applied to government liabilities. He argues that conventional “fiscal stimulus” reasoning is upended once government debt is recognized as nominal rather than real: a deficit is stimulative if and only if people do not expect future taxes or spending cuts to pay it off, and if so, future deficits are just as stimulative as current ones, so the standard “stimulus spending arrives too late” objection does not apply in this framework – though credibly communicating that debt will not be paid off is itself difficult, since most fiscal institutions are built to signal the opposite. On monetary policy, Cochrane contends that once nominal interest rates hit zero, “quantitative easing” that merely swaps money for short-term government debt does nothing, because the two are close to perfect substitutes at the margin; purchases of long-term debt can shift the timing but not the total magnitude of eventual inflation; and purchases of private debt can help only by relieving a genuine liquidity premium, an effect that is necessarily exhausted once that premium is satisfied. Extending the valuation equation to long-maturity debt, Cochrane argues that a plausible future “fiscal inflation” – one triggered by a reassessment of the government’s capacity or willingness to run future surpluses – would not appear as a sudden price-level jump but as a gradual process beginning with rising long-term interest rates, and that because credit guarantees, nominal government commitments, and growth effects on the present value of tax revenue can move the effective “fiscal limit” much closer than raw debt-to-GDP ratios suggest, such an event could arrive well before large current deficits, elevated debt/GDP, or overt debt monetization materialize. Finally, because in his account the fiscal valuation equation is itself what anchors inflation expectations, Cochrane argues a fiscal inflation is likely to act as a shift of the Phillips curve rather than a movement along it, so that – as illustrated in a calibrated New-Keynesian simulation in which output falls throughout an anticipated fiscal-inflation episode – such an event is more likely to resemble the stagflation of the 1970s than an inflationary boom, with correspondingly little that the Federal Reserve, legally barred from taking fiscal actions on its own, can do to prevent either outcome.

What do the VARs mean? Measuring the output effects of monetary policy

Cochrane argues that even once a VAR-based monetary policy shock is “correctly identified” – the focus of the extensive VAR literature on variable selection and shock orthogonalization – a further, purely theoretical identifying assumption is still required before the estimated impulse-response function can be read as the causal effect of that shock: whether anticipated monetary policy actions, not just unanticipated shocks, can themselves affect output. Using both a flexible linear model that weights anticipated and unanticipated money by a parameter lambda, and an explicit Rotemberg-style sticky-price model parameterized by a price-adjustment-cost parameter alpha, Cochrane shows that this single identifying choice moves the estimated output effects of monetary policy at least as much as, and typically more than, the variable-selection and orthogonalization assumptions the VAR literature usually debates. Applying both models to a standard M2 VAR and a federal-funds-rate VAR on 1959-1992 U.S. quarterly data, he finds that if anticipated money is assumed to have no effect on output – the implicit assumption behind treating the impulse-response function itself as the policy-invariant effect of a shock – the estimated output response to a shock not followed by the customary further monetary expansion is large, hump-shaped, and takes roughly five years to die out; but allowing anticipated money to matter even slightly shrinks this same estimated response dramatically, because most of the impulse-response function’s persistence then reflects the systematic further money growth that has historically followed such shocks, not the shock’s own lagged causal effect. The sticky-price model reproduces this result through a different mechanism and adds the counterintuitive finding that assuming stickier prices implies a smaller and shorter estimated output response to an unanticipated shock, since more of the VAR’s observed dynamics are then attributed to slow price adjustment. Cochrane concludes that data from a single policy regime cannot settle which identifying assumption is correct, but that circumstantial considerations – the otherwise-coincidental similarity in shape between the money and output impulse responses, and the alternative’s reliance on ad hoc multi-year delay and propagation mechanisms – favor giving at least some role to anticipated, systematic monetary policy, with direct implications for how VAR evidence is used to argue about the length and size of monetary policy’s real effects.