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On the Identification of Monetary (and Other) Shocks

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  • Martin Menner

    ()
    (Universidad de Alicante, Spain)

  • Hugo Rodríguez Mendizábal

    ()
    (Instituto de Análisis Económico (CSIC), Spain)

Abstract

The present DSGE model spells out explicitly the instrumentation of monetary policy. The interest rate is determined depending on supply and demand for reserves which are affected by fundamental shocks. Unexpected changes in the monetary conditions of the economy are interpreted as monetary shocks and have the usual effects on economic activity. This view of monetary policy may have important consequences for empirical research: In the model, contemporaneous correlations between interest rates, prices and output are due to the simultaneous effect of all fundamental shocks. We provide an example where these contemporaneous correlations may be misinterpreted as a Taylor rule.

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Article provided by Finnish Economic Association in its journal Finnish Economic Papers.

Volume (Year): 21 (2008)
Issue (Month): 1 (Spring)
Pages: 39-56

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Handle: RePEc:fep:journl:v:21:y:2008:i:1:p:39-56

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  1. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects and the monetary transmission mechanism," Staff Report 150, Federal Reserve Bank of Minneapolis.
  2. Lawrence J. Christiano & Christopher J. Gust, 1999. "Taylor rules in a limited participation model," Working Paper 9902, Federal Reserve Bank of Cleveland.
  3. Burkhard Heer & Andreas Schabert, 2000. "Open Market Operations as a Monetary Policy Shock Measure in a Quantitative Business Cycle Model," CESifo Working Paper Series 396, CESifo Group Munich.
  4. Coleman, Wilbur John, II & Gilles, Christian & Labadie, Pamela A, 1996. "A Model of the Federal Funds Market," Economic Theory, Springer, vol. 7(2), pages 337-57, February.
  5. Ibrahim Chowdhury & Mathias Hoffmann & Andreas Schabert, . "Inflation Dynamics and the Cost Channel of Monetary Transmission," Working Papers 2003_19, Business School - Economics, University of Glasgow, revised Oct 2003.
  6. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  7. Canova, Fabio & Nicolo, Gianni De, 2002. "Monetary disturbances matter for business fluctuations in the G-7," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1131-1159, September.
  8. Marvin J. Barth III & Valerie A. Ramey, 2000. "The Cost Channel of Monetary Transmission," NBER Working Papers 7675, National Bureau of Economic Research, Inc.
  9. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  10. Canova, Fabio & Pina, Joaquim Pivis, 1999. "Monetary Policy Misspecification in VAR Models," CEPR Discussion Papers 2333, C.E.P.R. Discussion Papers.
  11. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, vol. 78(1), pages 16-34, February.
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