Estimating Causal Effects of Monetary Policy for a Small Open Economy: Econometric Model and Estimation Framework

Markus Brueckner
Authors registered in the RePEc Author Service: Markus Brueckner

ANU Working Papers in Economics and Econometrics from Australian National University, College of Business and Economics, School of Economics

Abstract: This paper provides an econometric model and estimation framework that enables to obtain estimates of causal effects of monetary policy in a small open economy. The model and estimation framework explicitly takes into account the endogeneity of monetary policy: i.e. if the central bank has an target inflation, then monetary policy itself is a function of economic shocks that affect inflation and other macroeconomic outcomes of interest. This is the standard simultaneity problem, which to date has not been satisfactorily addressed in the empirical monetary policy literature. The simultaneity problem can only be addressed if one has a valid instrument for monetary policy. In this paper I provide a local projections instrumental variables framework that enables to provide causal estimates of the dynamic effects that monetary policy in a small open economy has on inflation, the output gap, credit growth, and the exchange rate in the presence of external shocks.

JEL-codes: C3 E3 E4 E6 (search for similar items in EconPapers)
Date: 2022-10
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ecm and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:acb:cbeeco:2022-689

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