Monetary Policy Shocks: Testing Identification Conditions Under Time-Varying Conditional Volatility

Michel Normandin (michel.normandin@hec.ca) and Louis Phaneuf

Cahiers de recherche from CIRPEE

Abstract: We propose an empirical procedure, which exploits the conditional heteroscedasticity of fundamental disturbances, to test the targeting and orthogonality restrictions imposed in the recent VAR literature to identify monetary policy shocks. Based on U.S. monthly data for the post-1982 period, we reject the nonborrowed-reserve and interest-rate targeting procedures. In contrast, we present evidence supporting targeting procedures implying more than one policy variable. We also always reject the orthogonality conditions between policy shocks and macroeconomic variables. We show that using invalid restrictions often produces misleading policy measures and dynamic responses. These results have important implications for the measurement of policy shocks and their temporal effects as well as for the estimation of the monetary authority's reaction function.

Keywords: Conditional heteroscedasticity; monetary policy indicators; orthogonality conditions (search for similar items in EconPapers)
JEL-codes: C32 E52 (search for similar items in EconPapers)
Date: 2003
New Economics Papers: this item is included in nep-ecm, nep-mac and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.cirpee.org/fileadmin/documents/Cahiers_2003/CIRPEE03-37.pdf (application/pdf)

Related works:
Journal Article: Monetary policy shocks:: Testing identification conditions under time-varying conditional volatility (2004)
Working Paper: Monetary Policy Shocks: Testing Identification Conditions Under Time-Varying Conditional Volatility (2003)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:lvl:lacicr:0337

Access Statistics for this paper

More papers in Cahiers de recherche from CIRPEE Contact information at EDIRC.
Bibliographic data for series maintained by Manuel Paradis (manuel.paradis.1@ulaval.ca).