Monetary Policy, Real Activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs

Dario Caldara and Edward Herbst

American Economic Journal: Macroeconomics, 2019, vol. 11, issue 1, 157-92

Abstract: In this paper we develop a Bayesian framework to estimate a proxy structural vector autoregression to identify monetary policy shocks. We find that during the Great Moderation period, monetary policy shocks induce a persistent decline in real activity and tightening in financial conditions. Central to this result is a systematic component of monetary policy characterized by a direct and economically significant reaction to changes in corporate credit spreads. The failure to account for this endogenous reaction induces an attenuation in the response of all variables to monetary shocks, a result that also applies to the narrative identification of Romer and Romer (2004).

JEL-codes: C32 E23 E32 E44 E52 E58 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mac.20170294
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Citations: View citations in EconPapers (176)

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Working Paper: Monetary Policy, Real Activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs (2016)
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