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Identifying the Monetary Transmission Mechanism Using Structural Breaks

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Author Info
Beyer, Andreas
Farmer, Roger E A

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Abstract

We propose a method for estimating a subset of the parameters of a structural rational expectations model by exploiting changes in policy. We define a class of models, midway between a vector autoregression and a structural model, that we call the recoverable structure. We provide an application of our method by estimating the parameters of a three equation model of the monetary transmission mechanism using data from 1970:Q1 to 1999:Q4. We estimate a vector autoregression and find that the parameters of this VAR are unstable. However, using our proposed identification method we are able to attribute instability in the parameters of the VAR solely to changes in the parameters of the policy rule. We recover parameter estimates of the recoverable structure and we demonstrate that these parameters are invariant to changes in policy. Since the recoverable structure includes future expectations as explanatory variables our parameter estimates are not subject to the Lucas Critique of Econometric Policy Evaluation.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 4106.

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Date of creation: Nov 2003
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Handle: RePEc:cpr:ceprdp:4106

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Related research
Keywords: Fed; identification; monetary transmission; recoverable structure; structural breaks;

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Find related papers by JEL classification:
C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Beyer, Andreas & Farmer, Roger E A & Henry, Jérôme & Marcellino, Massimiliano, 2005. "Factor Analysis in a New-Keynesian Model," CEPR Discussion Papers 5266, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  2. Andreas Beyer & Roger E. A. Farmer, 2006. "A method to generate structural impulse-responses for measuring the effects of shocks in structural macro models," Working Paper Series 586, European Central Bank. [Downloadable!]
  3. Sandrine Corvoisier & Benoît Mojon, 2005. "Breaks in the mean of inflation - how they happen and what to do with them," Working Paper Series 451, European Central Bank. [Downloadable!]
  4. Matt Klaeffling, 2003. "Macroeconomic modelling of monetary policy," Working Paper Series 257, European Central Bank. [Downloadable!]
  5. Roger E.A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Minimal state variable solutions to Markov-switching rational expectations models," Working Paper 2008-23, Federal Reserve Bank of Atlanta. [Downloadable!]
  6. Andreas Beyer & Roger E. A. Farmer, 2004. "On the Indeterminacy of New-Keynesian Economics," Computing in Economics and Finance 2004 152, Society for Computational Economics. [Downloadable!]
    Other versions:
  7. Anatoliy Belaygorod & Michael J. Dueker, 2007. "The price puzzle and indeterminacy in an estimated DSGE model," Working Papers 2006-025, Federal Reserve Bank of St. Louis. [Downloadable!]
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