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Monetary Policy Neutrality: Sign Restrictions Go to Monte Carlo

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  • Efrem Castelnuovo

    ()
    (University of Padova)

Abstract

A new-Keynesian DSGE model in which contractionary monetary policy shocks generate recessions is estimated with U.S. data. It is then used in a Monte Carlo exercise to generate artificial data with which VARs are estimated. VAR monetary policy shocks are identified via sign restrictions. Our VAR impulse responses replicate UhligÕs (2005, Journal of Monetary Economics) evidence on unexpected interest rate hikes having ambiguous effects on output. The mismatch between the true (DSGE-consistent) responses and those produced with sign-restriction VARs is shown to be due to the low relative strength of the signal of the monetary policy shock. We conclude that UhligÕs (2005) finding is not inconsistent with monetary policy non-neutrality.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0151.

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Length: 61 pages
Date of creation: Oct 2012
Date of revision:
Handle: RePEc:pad:wpaper:0151

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Keywords: Monetary policy shocks; VARs; sign restrictions; dynamic stochastic general equilibrium models; monetary neutrality.;

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Cited by:
  1. Matteo Barigozzi & Antonio M. Conti & Matteo Luciani, 2013. "Do euro area countries respond asymmetrically to the common monetary policy?," Temi di discussione (Economic working papers) 923, Bank of Italy, Economic Research and International Relations Area.

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