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Analyzing the effects of US monetary policy shocks in dollarized countries

Tim Willems

European Economic Review, 2013, vol. 61, issue C, 101-115

Abstract: Identifying monetary policy shocks is difficult. Therefore, instead of trying to do this perfectly, this paper exploits a natural setting that reduces the consequences of shock misidentification. It does so by basing conclusions upon the responses of variables in three dollarized countries (Ecuador, El Salvador, and Panama). They import US monetary policy just as genuine US states do, but have the advantage that non-monetary US shocks are not imported perfectly. Consequently, this setting reduces the effects of any mistakenly included non-monetary US shocks, while leaving the effects of true monetary shocks unaffected. Results suggest that prices fall after monetary contractions; output does not show a clear response.

Keywords: Monetary policy effects; Price puzzle; Structural VARs; Identification; Block exogeneity (search for similar items in EconPapers)
JEL-codes: E52 E31 C32 (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eecrev:v:61:y:2013:i:c:p:101-115

DOI: 10.1016/j.euroecorev.2013.03.005

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