Estimating US persistent and transitory monetary shocks: implications for monetary policy
AbstractThis paper proposes an estimation method for persistent and transitory monetary shocks using the monetary policy modeling proposed in Andolfatto et al, [Journal of Monetary Economics, 55 (2008), pp.: 406-422]. The contribution of the paper is threefold: a) to deal with non-Gaussian innovations, we consider a convenient reformulation of the state-space representation that enables us to use the Kalman filter as an optimal estimation algorithm. Now the state equation allows expectations play a significant role in explaining the future time evolution of monetary shocks; b) it offers the possibility to perform maximum likelihood estimation for all the parameters involved in the monetary policy, and c) as a consequence, we can estimate the conditional probability that a regime change has occurred in the current period given an observed monetary shock. Empirical evidence on US monetary policy making is provided through the lens of a Taylor rule, suggesting that the Fed’s policy was implemented accordingly with the macroeconomic conditions after the Great Moderation. The use of the particle filter produces similar quantitative and qualitative findings. However, our procedure has much less computational cost.
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Bibliographic InfoPaper provided by Universidad Carlos III, Departamento de Economía de la Empresa in its series Business Economics Working Papers with number wb113108.
Date of creation: Sep 2011
Date of revision:
Kalman filter; Non-normality; Particle filter; Monetary policy;
Find related papers by JEL classification:
- C4 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics
- F3 - International Economics - - International Finance
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-10-01 (All new papers)
- NEP-CBA-2011-10-01 (Central Banking)
- NEP-ECM-2011-10-01 (Econometrics)
- NEP-MAC-2011-10-01 (Macroeconomics)
- NEP-MON-2011-10-01 (Monetary Economics)
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.:
- Assenmacher-Wesche, Katrin, 2006. "Estimating Central Banks' preferences from a time-varying empirical reaction function," European Economic Review, Elsevier, vol. 50(8), pages 1951-1974, November.
- Mehdi Mostaghimi, 2004. "Monetary policy, composite leading economic indicators and predicting the 2001 recession," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(7), pages 463-477.
- Andolfatto, David & Hendry, Scott & Moran, Kevin, 2008.
"Are inflation expectations rational?,"
Journal of Monetary Economics,
Elsevier, vol. 55(2), pages 406-422, March.
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