Identifying Monetary Policy Shocks Through External Variable Constraints

Francesco Fusari
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Francesco Fusari: University of Surrey

No 123, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: This paper proposes a new strategy for the identification of monetary policy shocks in structural vector autoregressions (SVARs). It combines traditional sign restrictions with external variable constraints on high-frequency monetary surprises and central bank’s macroeconomic projections. I use it to characterize the transmission of US monetary policy over the period 1965-2007. First, I find that contractionary monetary policy shocks unequivocally decrease output, sharpening the ambiguous implications of standard sign-restricted SVARs. Second, I show that the identified structural models are consistent with narrative sign restrictions and restrictions on the monetary policy equation. On the contrary, the shocks identified through these alternative methodologies turn out to be correlated with the information set of the central bank and to weakly comove with monetary surprises. Finally, I implement an algorithm for robust Bayesian inference in set-identified SVARs, providing further evidence in support of my identification strategy.

JEL-codes: C51 E52 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2023-01
New Economics Papers: this item is included in nep-ban, nep-cba, nep-ecm, nep-ets, nep-his and nep-mon
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0123

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