A model of monetary policy shocks for financial crises and normal conditions
Andrew Smith () and
Victor (Vic) Valcarcel
No RWP 14-11, Research Working Paper from Federal Reserve Bank of Kansas City
In late 2008, deteriorating economic conditions led the Federal Reserve to lower the federal funds rate to near zero and inject massive liquidity into the financial system through novel facilities. The combination of conventional and unconventional measures complicates the challenging task of characterizing the effects of monetary policy. We develop a novel method of identifying these effects that maintains the classic assumptions that a central bank reacts to output and the price level contemporaneously and may only affect these variables with a lag. A New-Keynesian DSGE model augmented with a representative financial structure motivates our empirical specification. The equilibrium model provides theoretical support for our choice of different series to replace variables that were popular in models of monetary policy but became problematic in the aftermath of the 2008 financial crisis. One of our most important innovations is to utilize the Divisia M4 index of money as the policy indicator variable. The model is bolstered by its ability to produce plausible responses to a monetary policy shock in samples that include or exclude the recent crisis period.
Keywords: Monetary policy rules; Dynamic Stochastic General Equilibrium (DSGE) models; Money; Output puzzle; Price puzzle; Liquidity puzzle; Financial crisis; Divisia; Identification assumptions; Structural Vector Autoregressions (SVARs) (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 (search for similar items in EconPapers)
Pages: 74 pages
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://www.kansascityfed.org/documents/4411/A_Mod ... ormal_Conditions.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 403 Forbidden
Journal Article: A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions (2019)
Working Paper: A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:rwp14-11
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Research Working Paper from Federal Reserve Bank of Kansas City Contact information at EDIRC.
Bibliographic data for series maintained by ().