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What are the Effects of Monetary Policy Shocks? Evidence from Dollarized Countries

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  • Tim Willems

    ()
    (University of Amsterdam)

Abstract

Traditional ways of analyzing the effects of monetary policy shocks via structural vector autoregressions require the use of unrealistic identifying assumptions: they either do not allow for a response of output and prices on impact of the shock, or they exclude contemporaneous values of these variables from the monetary authority's information set. This paper relaxes these incredible restrictions by exploiting a convenient natural setting, namely the fact that we can use data from dollarized countries. The fact that non-monetary US shocks do not seem to be transmitted to these countries, has the additional advantage that it makes the exercise less vulnerable to potential misidentification of the US monetary policy shock. The results obtained in this way suggest that prices fall quite rapidly after a monetary contraction. Consistent with this finding, the effects of monetary policy shocks on output seem to be small.

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Bibliographic Info

Paper provided by Tinbergen Institute in its series Tinbergen Institute Discussion Papers with number 10-099/2.

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Date of creation: 01 Oct 2010
Date of revision: 25 Mar 2013
Handle: RePEc:dgr:uvatin:20100099

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Web page: http://www.tinbergen.nl

Related research

Keywords: Monetary policy effects; Price puzzle; Structural VARs; Identification; Block exogeneity;

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  1. van Wijnbergen, S., 1982. "Stagflationary effects of monetary stabilization policies : A quantitative analysis of South Korea," Journal of Development Economics, Elsevier, vol. 10(2), pages 133-169, April.
  2. Felipe Morandé Lavín & Mauricio Tejada, 2008. "Price Stickiness in Emerging Economies: Empirical Evidence for Four Latin-American Countries," Working Papers wp286, University of Chile, Department of Economics.
  3. Van Wijnbergen, S., 1983. "Interest rate management in LDC's," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 433-452, September.
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