Measuring multiple monetary policy shocks based on heteroscedasticity

Marc Burri and Daniel Kaufmann

No 24-03, IRENE Working Papers from IRENE Institute of Economic Research

Abstract: We propose a two-step approach to estimate multiple monetary policy shocks and their causal effects based on daily financial market data and policy events. First, we combine a heteroscedasticity-based identification scheme with recursive zero restrictions along the term structure of interest rates to disentangle multiple dimensions of monetary policy shocks. We derive an IV estimator that allows us to recursively estimate multi-dimensional causal effects at a daily frequency. Second, we exploit the cross-sectional heterogeneity of the impact effect on various financial market variables to predict the underlying unobserved monetary policy shocks. The heteroscedasticity-based monetary policy shocks have similar effects on financial and macroeconomic variables as those based on high-frequency identification. The weak instrument problem, which is often encountered when using high-frequency surprises in low-frequency macroeconomic models, is significantly less pronounced.

Keywords: Monetary policy shocks; forward guidance; large-scale asset purchases; identification through heteroscedasticity; instrumental variables; Kalman filter; term structure of interest rates (search for similar items in EconPapers)
JEL-codes: C3 E3 E4 E5 (search for similar items in EconPapers)
Pages: 60 pages.
Date: 2024-08
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-inv and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:irn:wpaper:24-03

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