Evidence from dollarized countries in Latin America suggests that monetary policy has an effect on prices, but not output

Over the past three decades, monetary policy has become the tool of choice for policymakers who wish to influence the economy. But does pulling the lever of monetary policy actually give the intended result, or are policy changes simply responses to economic developments? Using Latin American countries that use the dollar as a natural experiment, Tim Willems finds that when the U.S. Federal Reserve contracts the money supply, this leads to a fall in prices, and little initial movement of output.