We develop and implement a limited information diagnostic strategy for assessing the plausibility of monetary business cycle models. Our strategy focuses on a model's ability to reproduce empirical estimates of an actual economy's response to monetary policy shocks. A key input to this...

This paper provides new evidence that models of the monetary transmission mechanism should be consistent with at least the following facts. In response to a contractionary monetary policy shock, the aggregate price level responds very little, aggregate output falls, interest rates initially...