Modest Macroeconomic Effects of Monetary Policy Shocks during the Great Moderation: An Alternative Interpretation

Efrem Castelnuovo

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: Cholesky-VAR impulse responses estimated with post-1984 U.S. data predict modest macroeconomic reactions to monetary policy shocks. We interpret this evidence by employing an estimated medium-scale DSGE model of the business cycle as a DataGenerating Process in a Monte Carlo exercise in which a Cholesky-VAR econometrician is asked to estimate the effects of an unexpected, temporary increase in the policy rate. Our structural DSGE model predicts conventional macroeconomic reactions to a policy shock. In contrast, our Monte Carlo VAR results replicate our evidence obtained with actual U.S. data. Hence, modest macroeconomic effects may very well be an artifact of Cholesky-VARs. A combination of supply and demand shocks may be behind the inability of Cholesky-VARs to replicate the actual macroeconomic responses. The difference in the VAR responses obtained with Great Inflation vs. Great Moderation data may be due to instabilities in the parameters related to households’ and firms’ programs, more than to a more aggressive systematic monetary policy. A Monte Carlo assessment of sign restrictions as an alternative identification strategy is also proposed.

Keywords: Monetary policy shocks; Cholesky identification; VARs; Dynamic Stochastic General Equilibrium models; Monte Carlo simulations (search for similar items in EconPapers)
JEL-codes: C3 E3 (search for similar items in EconPapers)
Pages: 35pp
Date: 2016-10
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://melbourneinstitute.unimelb.edu.au/downloads ... series/wp2016n30.pdf (application/pdf)

Related works:
Journal Article: Modest macroeconomic effects of monetary policy shocks during the great moderation: An alternative interpretation (2016)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iae:iaewps:wp2016n30

Access Statistics for this paper

More papers in Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne Melbourne Institute of Applied Economic and Social Research, The University of Melbourne, Victoria 3010 Australia. Contact information at EDIRC.
Bibliographic data for series maintained by Sheri Carnegie ().