Under the same (Chole)sky: DNK models, timing restrictions and recursive identification of monetary policy shocks

Giovanni Angelini and Marco Sorge

Working Papers from Dipartimento Scienze Economiche, Universita' di Bologna

Abstract: Recent structural VAR studies of the monetary transmission mechanism have voiced concerns about the use of recursive identification schemes based on short-run exclusion restrictions. We trace out the effects on impulse propagation of informational constraints embodying classical Cholesky-timing restrictions in otherwise standard Dynamic New Keynesian (DNK) models. By reinforcing internal propagation mechanisms and enlarging a model's equilibrium state space, timing restrictions may produce a non-trivial moving average component of the equilibrium representation, making finite order VARs a poor approximation of true adjustment paths to monetary impulses, albeit correctly identified. They can even serve as an independent source of model-based nonfundamentalness, thereby hampering shock identification via VAR methods. This notwithstanding, restricted DNK models are shown to feature (i) invertible equilibrium representations for the observables and (ii) fast-converging VAR coefficient matrices under empirically tenable parameterizations. This alleviates concerns about identification and lag truncation bias: low-order Cholesky-VARs do well at uncovering the transmission of monetary impulses in a truly Cholesky world.

JEL-codes: C3 E3 (search for similar items in EconPapers)
Date: 2021-04
New Economics Papers: this item is included in nep-ecm, nep-ets, nep-mac, nep-mon and nep-ore
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Journal Article: Under the same (Chole)sky: DNK models, timing restrictions and recursive identification of monetary policy shocks (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:bol:bodewp:wp1160

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