Monetary Policy, External Instruments and Heteroskedasticity

Thore Schlaak, Malte Rieth () and Maximilian Podstawski

No 1749, Discussion Papers of DIW Berlin from DIW Berlin, German Institute for Economic Research

Abstract: We develop a structural vector autoregressive framework that combines external instruments and heteroskedasticity for identification of monetary policy shocks. We show that exploiting both types of information sharpens structural inference, allows testing the relevance and exogeneity condition for instruments separately using likelihood ratio tests, and facilitates the economic interpretation of the structural shock of interest. We test alternative instruments and find that narrative and model-based measures are valid, while high-frequency data instruments show signs of invalidity. Finally, we document that monetary shocks identified with both a valid instrument and heteroskedasticity have larger effects on production and prices than monetary shocks identified via an instrument only.

Keywords: Monetary policy; structural vector autoregressions; identification with external instrument; heteroskedasticity; Markov switching (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 E58 (search for similar items in EconPapers)
Pages: 31 p.
Date: 2018
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Monetary policy, external instruments, and heteroskedasticity (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:diw:diwwpp:dp1749

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