Revisiting the effects of monetary policy shocks: Evidence from SVAR with narrative sign restrictions

Kai Cheng and Yang Yang

Economics Letters, 2020, vol. 196, issue C

Abstract: This article analyzes the effects of monetary policy shocks using a structural vector autoregression (SVAR) model that is identified using a combination of narrative sign restrictions and sign restrictions on the systematic component of monetary policy. We find that contractionary monetary policy shocks induce real GDP to drop with very high posterior probability when narrative sign restrictions are included. The posterior probability intervals of the structural parameters in the monetary policy equation based on our restrictions are smaller than those constructed by Arias et al. (2019), excluding some implausible large values. Subsample analysis shows that the “price puzzle” disappeared during the Great Moderation.

Keywords: SVAR; Monetary policy shocks; Narrative sign restrictions; Systematic component of monetary policy (search for similar items in EconPapers)
JEL-codes: C32 E52 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:196:y:2020:i:c:s0165176520303591

DOI: 10.1016/j.econlet.2020.109598

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