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

Dario Caldara and Edward Herbst

No 2016-049, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper studies the interaction between monetary policy, financial markets, and the real economy. We develop a Bayesian framework to estimate proxy structural vector autoregressions (SVARs) in which monetary policy shocks are identified by exploiting the information contained in high frequency data. For the Great Moderation period, we find that monetary policy shocks are key drivers of fluctuations in industrial output and corporate credit spreads, explaining about 20 percent of the volatility of these variables. Central to this result is a systematic component of monetary policy characterized by a direct and economically significant reaction to changes in credit spreads. We show that the failure to account for this endogenous reaction induces an attenuation bias in the response of all variables to monetary shocks.

Keywords: Bayesian Inference; Monetary policy; Vector Autoregressions (search for similar items in EconPapers)
JEL-codes: C3 C5 E52 (search for similar items in EconPapers)
Pages: 51 pages
Date: 2016-05
New Economics Papers: this item is included in nep-mac, nep-mon and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (77)

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http://www.federalreserve.gov/econresdata/feds/2016/files/2016049pap.pdf (application/pdf)

Related works:
Journal Article: Monetary Policy, Real Activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2016-49

DOI: 10.17016/FEDS.2016.049

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