Monetary Policy Shocks and Narrative Restrictions: Rules Matter

Efrem Castelnuovo, Giovanni Pellegrino and Laust L. Sarkjar

CAMA Working Papers from Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University

Abstract: Imposing restrictions on policy rule coefficients in vector autoregressive (VAR) models enhances the identification of monetary policy shocks obtained with sign and narrative restrictions. Monte Carlo simulations and empirical analyses for the United States and the Euro area support this result. For the U.S., adding policy coefficient restrictions yields a larger and more precise short-run output response and more stable Phillips multiplier estimates. Heterogeneity in output responses reflects variation in systematic policy reactions to output. In the Euro area, policy coefficient restrictions sharpen the identification of corporate bond spread responses to monetary policy shocks.

Keywords: monetary policy shocks; narrative restrictions; policy coefficient restrictions; vector autoregressive models; Monte Carlo simulations; DSGE models (search for similar items in EconPapers)
JEL-codes: C32 E32 E52 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2025-11
New Economics Papers: this item is included in nep-ecm and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:een:camaaa:2025-62

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