Ben s. Bernanke and Mark Gertler 33 ure Responses of Spending Components to a Monetary Policy Shock 0.00021 0.0001 一0.0003 0.006 Business Fixed Investment 00007 some important components of private domestic spending. As noted in Fact 3 above, residential investment drops sharply following a monetary tightening and accounts for a large part of the initial decline in final demand. Next in importance are consumer durables and nondurables, which also contribute significantly to the fall in final de- mand.(Nondurables react by much less in percentage terms than durables do, but they make a similar total contribution to the downturn owing to their larger share in overall economic activity. Figure 3 shows that business fixed investment also declines following a monetary tightening but with a greater lag than other types of spending (Fact 4). An interesting result(not shown in the figure)is that equipment investment accounts for nearly all of the decline in fixed investment; structures investment by businesses appears to respond very little to a monetary policy shock Does the Conventional Story Fit the Facts? In a number of ways, the behavior of the economy shown in Figures 1-3, and s summarized by Facts 1-4, is consistent with the conventional analysis of monetary policy transmission. According to the standard story, the Fed has leverage over th short term real rate because prices are sticky. In turn, the change in real rates affects aggregate demand. The slow response of the gDP deflator in the wake of the mon- etary contraction(Figure 1)and the quick response of final demand(Figure 2)are consistent with this scenario. Apparently, so too is the fact that durables spending- traditionally thought to be the most interest-sensitive part of aggregate demand- displays large responses to monetary policy shocks But there are some important puzzles. First among these is the magnitude ofBen S. Bernanke and Mark Gertler 33 Figure 3 Responses of Spending Components to a Monetary Policy Shock 0.0002 0.0001 0.0000 l -\-/t -0.0002 \_ / -0.0005 \2 - Consumer Durables \. _/ -- - Nonidurable Conisumption -0.0006 - - Residential Investment Rusincss Fixcd I-ivestmcn-t -0.0007 0 4 8 12 16 20 24 28 32 36 40 44 48 Moniths some important components of private domestic spending. As noted in Fact 3 above, residential investment drops sharply following a monetary tightening and accounts for a large part of the initial decline in final demand. Next in importance are consumer durables and nondurables, which also contribute significantly to the fall in final de￾mand. (Nondurables react by much less in percentage terms than durables do, but they make a similar total contribution to the downturn owing to their larger share in overall economic activity.) Figure 3 shows that business fixed investment also declines following a monetary tightening, but with a greater lag than other types of spending (Fact 4). An interesting result (not shown in the figure) is that equipment investment accounts for nearly all of the decline in fixed investment; structures investment by businesses appears to respond very litfle to a monetary policy shock. Does the Conventional Story Fit the Facts? In a number of ways, the behavior of the economy shown in Figures 1-3, and as summarized by Facts 1-4, is consistent with the conventional analysis of monetary policy transmission. According to the standard story, the Fed has leverage over the short-term real rate because prices are sticky. In turn, the change in real rates affects aggregate demand. The slow response of the GDP deflator in the wake of the mon￾etary contraction (Figure 1) and the quick response of final demand (Figure 2) are consistent with this scenario. Apparently, so too is the fact that durables spending￾traditionally thought to be the most interest-sensitive part of aggregate demand￾displays large responses to monetary policy shocks. But there are some important puzzles. First among these is the magnitude of