Postwar U. S. time series for money, interest rates, prices, and GNP are characterized by a multivariate process driven by four exogenous disturbances. Those disturbances are identified so that they can be interpreted as the four main sources of fluctuations found in the IS-LM-Phillips curve model: money supply, money demand, IS, and aggregate supply shocks. The dynamic properties of the estimated model are analyzed and shown to match most of the stylized predictions of the model. The estimated decomposition is also used to measure the relative importance of each shock, to interpret some macroeconomic episodes, and to study sources of permanent shocks to nominal variables.

What are the channels through which monetary policy affects financial stability? Can (and should) central banks prevent financial crises by deviating from price stability? To what extent may monetary policy itself unintentionally breed financial vulnerabilities? We answer these questions using a New Keynesian model with capital accumulation and endogenous financial crises due to adverse selection and moral hazard in credit markets. Our findings are threefold. First, monetary policy affects the probability of a crisis both in the short run (via aggregate demand) and in the medium run (via capital accumulation). Second, the central bank can reduce the incidence of crises in the medium run by tolerating higher inflation volatility in the short run. Third, prolonged periods of loose monetary policy followed by a sharp tightening can lead to financial crises.