Multi-dimensional monetary policy shocks based on heteroscedasticity

Marc Burri and Daniel Kaufmann

No 24-03, IRENE Working Papers from IRENE Institute of Economic Research

Abstract: We propose a two-step approach to estimate multi-dimensional monetary policy shocks and their causal effects requiring only daily financial market data and policy events. First, we combine a heteroscedasticity-based identification scheme with recursive zero restrictions along the term structure of interest rates to disentangle multi-dimensional monetary policy shocks and derive an instrumental variables estimator to estimate dynamic causal effects. Second, we propose to use the Kalman filter to compute the linear minimum mean-square-error prediction of the unobserved monetary policy shocks. We apply the approach to examine the causal effects of US monetary policy on the exchange rate. The heteroscedasticity-based monetary policy shocks display a relevant correlation with existing high-frequency surprises. In addition, their dynamic causal effects on the exchange rate are similar. This suggests the approach is a valid alternative if high-frequency identification schemes are not applicable.

Keywords: Monetary policy shocks; forward guidance; large-scale asset purchases; identification through heteroscedasticity; instrumental variables; term structure of interest rates; exchange rate (search for similar items in EconPapers)
JEL-codes: C3 E3 E4 E5 F3 (search for similar items in EconPapers)
Pages: 51 pages.
Date: 2024-08
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-inv and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:irn:wpaper:24-03

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