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Monetary policy shocks:: Testing identification conditions under time-varying conditional volatility

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  • Normandin, Michel
  • Phaneuf, Louis

Abstract

We propose an empirical procedure, which exploits the conditional heteroscedasticity of fundamental disturbances, to test the targeting and orthogonality restrictions imposed in the recent VAR literature to identify monetary policy shocks. Based on U.S. monthly data for the post-1982 period, we reject the non borrowed-reserve and interest-rate targeting procedures. In contrast, we present evidence supporting targeting procedures implying more than one policy variable. We also always reject the orthogonality conditions between policy shocks and macroeconomic variables. We show that using invalid restrictions often produces misleading policy measures and dynamic responses. These results have important implications for the measurement of policy shocks and their temporal effects as well as for the estimation of the monetary authority’s reaction function.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 51 (2004)
Issue (Month): 6 (September)
Pages: 1217-1243

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Handle: RePEc:eee:moneco:v:51:y:2004:i:6:p:1217-1243

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Web page: http://www.elsevier.com/locate/inca/505566

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  1. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta.
  2. Christopher A. Sims & Tao Zha, 1999. "Error Bands for Impulse Responses," Econometrica, Econometric Society, vol. 67(5), pages 1113-1156, September.
  3. Sentana, Enrique & Fiorentini, Gabriele, 2001. "Identification, estimation and testing of conditionally heteroskedastic factor models," Journal of Econometrics, Elsevier, vol. 102(2), pages 143-164, June.
  4. David B. Gordon & Eric M. Leeper, 1993. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 93-5, Federal Reserve Bank of Atlanta.
  5. Ben S. Bernanke & Ilian Mihov, 1995. "Measuring monetary policy," Working Papers in Applied Economic Theory 95-09, Federal Reserve Bank of San Francisco.
  6. Michel Normandin, 2003. "Canadian and U.S. Financial Markets: Testing the International Integration Hypothesis Under Time-Varying Conditional Volatility," Cahiers de recherche 03-08, HEC Montréal, Institut d'économie appliquée.
  7. Allan D. Brunner, 1994. "The federal funds rate and the implementation of monetary policy: estimating the Federal Reserve's reaction function," International Finance Discussion Papers 466, Board of Governors of the Federal Reserve System (U.S.).
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 1994. "The effects of monetary policy shocks: evidence from the flow of funds," Proceedings, Federal Reserve Bank of Dallas, issue Apr.
  9. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  10. Davidson, Russell & MacKinnon, James G., 1993. "Estimation and Inference in Econometrics," OUP Catalogue, Oxford University Press, number 9780195060119.
  11. Mervyn King & Enrique Sentana & Sushil Wadhwani, 1990. "Volatiltiy and Links Between National Stock Markets," NBER Working Papers 3357, National Bureau of Economic Research, Inc.
  12. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  13. Lawrence J. Christiano & Martin Eichenbaum, 1991. "Identification and the Liquidity Effect of a Monetary Policy Shock," NBER Working Papers 3920, National Bureau of Economic Research, Inc.
  14. Michel Normandin, 1999. "The Integration of Financial Markets and the Conduct of Monetary Policies: The Case of Canada and the United States," Cahiers de recherche CREFE / CREFE Working Papers 67, CREFE, Université du Québec à Montréal.
  15. Engle, Robert F, 1982. "Autoregressive Conditional Heteroscedasticity with Estimates of the Variance of United Kingdom Inflation," Econometrica, Econometric Society, vol. 50(4), pages 987-1007, July.
  16. Strongin, Steven, 1995. "The identification of monetary policy disturbances explaining the liquidity puzzle," Journal of Monetary Economics, Elsevier, vol. 35(3), pages 463-497, June.
  17. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
  18. Bollerslev, Tim & Chou, Ray Y. & Kroner, Kenneth F., 1992. "ARCH modeling in finance : A review of the theory and empirical evidence," Journal of Econometrics, Elsevier, vol. 52(1-2), pages 5-59.
  19. Adrian R. Pagan & John C. Robertson, 1995. "Resolving the liquidity effect," Proceedings, Federal Reserve Bank of St. Louis, issue May, pages 33-54.
  20. Romer, Christina D. & Romer, David H., 1994. "Monetary policy matters," Journal of Monetary Economics, Elsevier, vol. 34(1), pages 75-88, August.
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Citations

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Cited by:
  1. Michel Normandin, 2003. "Canadian and U.S. Financial Markets: Testing the International Integration Hypothesis Under Time-Varying Conditional Volatility," Cahiers de recherche 03-08, HEC Montréal, Institut d'économie appliquée.
  2. Tomas Havranek & Marek Rusnak, 2013. "Transmission Lags of Monetary Policy: A Meta-Analysis," International Journal of Central Banking, International Journal of Central Banking, vol. 9(4), pages 39-76, December.
  3. Hafedh Bouakez & Badye Omar Essid & Michel Normandin, 2010. "Stock Returns and Monetary Policy: Are There Any Ties ?," Cahiers de recherche 1026, CIRPEE.
  4. Hafedh Bouakez & Michel Normandin, 2008. "Fluctuations in the Foreign Exchange Market: How Important are Monetary Policy Shocks?," Cahiers de recherche 0818, CIRPEE.
  5. Berument, Hakan & Togay, Selahattin & Sahin, Afsin, 2011. "Identifying the Liquidity Effects of Monetary Policy Shocks For a Small Open Economy: Turkey," MPRA Paper 46883, University Library of Munich, Germany.
  6. Hafedh Bouakez & Foued Chihi & Michel Normandin, 2010. "Measuring the Effects of Fiscal Policy," Cahiers de recherche 1016, CIRPEE.
  7. Helmut Lütkepohl & Aleksei Netsunajev, 2014. "Structural Vector Autoregressions with Smooth Transition in Variances - The Interaction Between U.S. Monetary Policy and the Stock Market," SFB 649 Discussion Papers SFB649DP2014-031, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
  8. Helmut Lütkepohl, 2012. "Identifying Structural Vector Autoregressions via Changes in Volatility," Discussion Papers of DIW Berlin 1259, DIW Berlin, German Institute for Economic Research.
  9. Michel Normandin, 2006. "The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigation The Effects of Monetary-Policy Shocks on Real Wages: A Multi-Country Investigationv," Cahiers de recherche 06-04, HEC Montréal, Institut d'économie appliquée.
  10. Helmut Luetkepohl & Anton Velinov, 2014. "Structural Vector Autoregressions: Checking Identifying Long-run Restrictions via Heteroskedasticity," CESifo Working Paper Series 4651, CESifo Group Munich.
  11. Ambler, Steve & Guay, Alain & Phaneuf, Louis, 2012. "Endogenous business cycle propagation and the persistence problem: The role of labor-market frictions," Journal of Economic Dynamics and Control, Elsevier, vol. 36(1), pages 47-62.
  12. Backus, David & Chernov, Mikhail & Zin, Stanley E., 2013. "Identifying Taylor rules in macro-finance models," CEPR Discussion Papers 9611, C.E.P.R. Discussion Papers.
  13. Helmut Lütkepohl & Aleksei Netsunajev, 2012. "Disentangling Demand and Supply Shocks in the Crude Oil Market: How to Check Sign Restrictions in Structural VARs," Discussion Papers of DIW Berlin 1195, DIW Berlin, German Institute for Economic Research.

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