Evaluating Monetary Policy Counterfactuals: When Do We Need Structural Models?

Tomás E. Caravello, Alisdair McKay and Christian Wolf

No 32988, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We give conditions under which knowledge of the effects of monetary policy shocks suffices to evaluate policy counterfactuals that change not just the monetary rule, but also the nature of equilibrium selection. For example, the effects of monetary policy shocks in a regime of monetary dominance can be used to evaluate counterfactual outcomes even under a regime switch to fiscal dominance. Since the empirical literature delivers the causal effects of short-lived monetary shocks, the sole remaining role of model structure in evaluating such counterfactuals is thus to extrapolate from the effects of transitory to those of more persistent policy rate changes. Among popular models of monetary policy transmission, household heterogeneity (as in the burgeoning “HANK” literature) does not change this extrapolation very much, while behavioral frictions do.

JEL-codes: E32 E58 E61 (search for similar items in EconPapers)
Date: 2024-09
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-ets and nep-mac
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