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Monetary policy shocks, Choleski identification, and DNK models

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Author Info

  • Carlstrom, Charles T.
  • Fuerst, Timothy S.
  • Paustian, Matthias

Abstract

A popular identifying assumption in structural VAR studies is that the monetary policy shock does not affect macroeconomic variables contemporaneously. We examine the consequences of using this identification strategy when the data-generating process is a basic Dynamic New Keynesian (DNK) model but without these assumed time delays. The principle conclusion is that the standard Choleski assumption can severely distort the impulse response functions, producing price puzzles and muted responses of inflation and the output gap to monetary shocks.

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Bibliographic Info

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

Volume (Year): 56 (2009)
Issue (Month): 7 (October)
Pages: 1014-1021

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Handle: RePEc:eee:moneco:v:56:y:2009:i:7:p:1014-1021

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

Related research

Keywords: Choleski identification Vector auto regression Dynamic new keynesian model;

References

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  1. Charles T. Carlstrom & Timothy S. Fuerst, 2000. "Monetary shocks, agency costs, and business cycles," Working Paper 0011, Federal Reserve Bank of Cleveland.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky Price and Limited Participation Models of Money: A Comparison," NBER Working Papers 5804, National Bureau of Economic Research, Inc.
  3. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
  5. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  6. Jordi Galí, 2008. "Monetary Policy and the Open Economy
    [Monetary Policy, Inflation, and the Business Cycle: An Introduction to the New Keynesian Framework]
    ," Introductory Chapters, Princeton University Press.
  7. Ben Bernanke & Mark Gertler & Simon Gilchrist, 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," NBER Working Papers 6455, National Bureau of Economic Research, Inc.
  8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  9. Erceg, Christopher & Levin, Andrew, 2006. "Optimal monetary policy with durable consumption goods," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1341-1359, October.
  10. Monacelli, Tommaso, 2006. "New Keynesian Models, Durable Goods and Collateral Constraints," CEPR Discussion Papers 5916, C.E.P.R. Discussion Papers.
  11. Federico Ravenna, 2006. "Vector autoregressions and reduced form representations of DSGE models," Banco de Espa�a Working Papers 0619, Banco de Espa�a.
  12. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2008. "Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory?," NBER Working Papers 14430, National Bureau of Economic Research, Inc.
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Citations

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Cited by:
  1. Girardin, Eric & Moussa, Zakaria, 2011. "Quantitative easing works: Lessons from the unique experience in Japan 2001–2006," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 21(4), pages 461-495, October.
  2. Tas, Bedri Kamil Onur, 2011. "An explanation for the price puzzle: Asymmetric information and expectation dynamics," Journal of Macroeconomics, Elsevier, vol. 33(2), pages 259-275, June.
  3. Marek Rusnak & Tomas Havranek & Roman Horvath, 2013. "How to Solve the Price Puzzle? A Meta‐Analysis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(1), pages 37-70, 02.
  4. Stephane Dees & M. Hashem Pesaran & L. Vanessa Smith & Ron P. Smith, 2010. "Supply, Demand and Monetary Policy Shocks in a Multi-Country New Keynesian Model," CESifo Working Paper Series 3081, CESifo Group Munich.
  5. Willems, Tim, 2013. "Analyzing the effects of US monetary policy shocks in dollarized countries," European Economic Review, Elsevier, vol. 61(C), pages 101-115.
  6. Jääskelä, Jarkko P. & Jennings, David, 2011. "Monetary policy and the exchange rate: Evaluation of VAR models," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1358-1374.
  7. Liu, Lin & Hussain, Syed, 2013. "Understanding the Sims-Cogley-Nason Approach in A Finite Sample," MPRA Paper 53118, University Library of Munich, Germany.

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