Monetary Policy Neutrality: Sign Restrictions Go to Monte Carlo

Efrem Castelnuovo

No 151, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: A new-Keynesian DSGE model in which contractionary monetary policy shocks generate recessions is estimated with U.S. data. It is then used in a Monte Carlo exercise to generate artificial data with which VARs are estimated. VAR monetary policy shocks are identified via sign restrictions. Our VAR impulse responses replicate UhligÕs (2005, Journal of Monetary Economics) evidence on unexpected interest rate hikes having ambiguous effects on output. The mismatch between the true (DSGE-consistent) responses and those produced with sign-restriction VARs is shown to be due to the low relative strength of the signal of the monetary policy shock. We conclude that UhligÕs (2005) finding is not inconsistent with monetary policy non-neutrality.

Keywords: Monetary policy shocks; VARs; sign restrictions; dynamic stochastic general equilibrium models; monetary neutrality. (search for similar items in EconPapers)
JEL-codes: C3 E4 E5 (search for similar items in EconPapers)
Pages: 61 pages
Date: 2012-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
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Citations: View citations in EconPapers (12)

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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0151

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