How Do We Measure the Economic Impact of Monetary Policy?

Lucia Milena Murgia ()
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Lucia Milena Murgia: University College London, School of Management

Chapter Chapter 5 in The Impact of Monetary Policy, 2026, pp 53-74 from Springer

Abstract: Abstract This chapter explores how economists measure the macroeconomic effects of monetary policy. It traces the evolution from early vector autoregressions (à la Sims) and recursive identification, highlighting classic issues such as the “price puzzle” and instrument choice, to approaches that foreground the unexpected component of policy, distinguishing monetary policy innovations (MPIs) from true monetary policy shocks (MPS). The review covers narrative identification using central bank forecasts and records, sign-restriction strategies, and high-frequency market-based surprises that exploit narrow announcement windows. Attention is given to challenges posed by the zero-lower bound, unconventional tools, evolving communication practices, and crisis episodes. Methodologically, the chapter contrasts VAR-based impulse responses with local projections (including LP-IV), discussing robustness, orthogonality, and forecast-information “purging”.

Date: 2026
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Persistent link: https://EconPapers.repec.org/RePEc:spr:fimchp:978-3-032-15451-4_5

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DOI: 10.1007/978-3-032-15451-4_5

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