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

Michel Normandin () and Louis Phaneuf

No 03-04, Cahiers de recherche from HEC Montréal, Institut d'économie appliquée

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 non borrowed-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)
New Economics Papers: this item is included in nep-ets, nep-mac, nep-mfd and nep-mon
Date: 2003-10
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Related works:
Working Paper: Monetary Policy Shocks: Testing Identification Conditions Under Time-Varying Conditional Volatility (2003)
Journal Article: Monetary policy shocks:: Testing identification conditions under time-varying conditional volatility (2004)
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