Using US quarterly data (1967–2023), including inflation’s post-pandemic surge and decline alongside monetary policies characterized by quantitative easing before refocusing on the 2% target, we utilize traditional and novel econometric tools to assess the stability of key macroeconomic variables’ responses to monetary shocks. Our findings confirm the relevance of a broad Divisia aggregate in understanding monetary policy transmission and highlight its empirical importance in explaining output and price dynamics across decades. Time-varying impulse response functions (IRFs) reveal consistent and puzzle-free price responses to Divisia-based monetary shocks throughout the sample, aligning with theory. Time-varying IRFs indicate that pandemic-related outliers in GDP (2020Q2) do not disrupt results. In contrast, Fed Funds rate or shadow policy interest rate shocks often yield puzzling outcomes across earlier and extended periods.

In this paper, we study the role of habit formation in accounting for thejoint behavior of the real interest rate and consumption growth following amonetary policy shock. A VAR estimation on US data shows that following acontractionary monetary policy shock, the real interest rate exhibits apersistent increase while consumption growth drops persistently. As thestandard permanent income model is known to be unable to replicate thisco–movement for intertemporal substitution motives, we introduce habitpersistence in consumption behavior. We test the implied Euler equationusing a method of moments on conditional moments (IRF) obtained from the VARmodel. Our estimates of the habit persistence parameter are similar toprevious results in the literature. Further, we find empirical support infavor of habit formation as a relevant assumption to represent the jointbehavior of the real interest rate and consumption growth following amonetary policy shock. Finally, we show that habit formation allowsweakening the intertemporal substitution mechanism.