On the Derivation of Monetary Policy Shocks: Should We Throw the VAR Out with the Bath Water?

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On the Derivation of Monetary Policy Shocks: Should We Throw the VAR Out with the Bath Water?

Author Info

Brunner, Allan D

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Allan D. Brunner

Abstract

This paper considers an alternative econometric approach to the standard VAR methodology for identifying and estimating the effects of monetary policy shocks. The alternative approach makes more reasonable assumptions about economic agents' information set by: 1) restructuring the VAR variables according to what data are actually observable in each point in time, and 2) augmenting the VAR model with available measures of market participants' expectations of various economic variables, thus increasing the assumed information set. Should we throw the VAR out with the bath water? Unfortunately, the results of this paper are somewhat inconclusive. The expectations measures prove to be quite valuable--the variances of all innovations are reduced by at least one-half compared to the standard VAR innovations. Nevertheless, the innovations, monetary policy shocks, and impulse responses for both methods are fairly similar. Indeed, they are similar enough that the standard VAR approach cannot be rejected out of hand, but dissimilar enough that the standard approach cannot be validated.

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Publisher Info
Article provided by Blackwell Publishing in its journal Journal of Money, Credit and Banking.

Volume (Year): 32 (2000)
Issue (Month): 2 (May)
Pages: 254-79
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Handle: RePEc:mcb:jmoncb:v:32:y:2000:i:2:p:254-79

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- Refet S. Gürkaynak & Andrew T. Levin & Andrew N. Marder & Eric T. Swanson, 2006. "Inflation Targeting And The Anchoring Of Inflation Expectations In The Western Hemisphere," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 9(3), pages 19-52, December. [Downloadable!]
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- Anthony Garratt & Kevin Lee & Emi Mise & Kalvinder Shields, 2008. "Real-Time Representations of the Output Gap," The Review of Economics and Statistics, MIT Press, vol. 90(4), pages 792-804, 04. [Downloadable!] (restricted)
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