How to measure the effects of monetary policy on the economy is a much-discussed issue in economics. It is difficult as monetary policy is not conducted independently of economic developments, but as a reaction to what happens in the economy. Monetary policy is thus said to be "endogenous". In addition, monetary policy affects the economy with a certain time lag.

For example, a rise in inflation after monetary policy has been tightened is not necessarily due to the contractionary policy. It is more likely that monetary policy is being tightened because the central bank is trying to dampen inflation that is already rising by increasing the interest rate, but it takes time before inflation is affected. To get around this problem, researchers and central bank economists try to identify "exogenous" changes in monetary policy, that is, changes that are not driven by other events in the economy, and that were not previously expected by economic agents. Researchers and economists can then be more confident that the effects measured after such a change are actually due to monetary policy, and not to something else that has happened in the economy.^[3] Christiano et al. (1999) discuss how to identify exogenous changes in monetary policy, and Sims (2011) provides a historical perspective. There is currently a rich literature studying the transmission mechanism of monetary policy using various empirical methods; see for example Kuttner (2001), Romer and Romer (2004), Coibion (2012), Ramey (2016), Nakamura and Steinsson (2018) and Antolín-Díaz and Rubio-Ramirez (2018).