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Monetary Policy Transmission in Italy: A BVAR Analysis with Sign Restriction

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Abstract

In this paper, we propose a Bayesian VAR model to examine the short term effects of monetary policy shocks on the Italian economy. Firstly, our BVAR model uses the Cholesky decomposition to identify four kinds of macroeconomic shocks, namely, supply, demand, interest rate and monetary shocks. Then, from the theoretical model, we derive and impose a minimum set of robust sign restrictions to identify the transmission mechanism of monetary tightening. The outcomes from the sign identification confirm the micro evidence on inflation persistence. Moreover, our results show a greater persistence of inflation to monetary restriction than Cholesky identification presents. Overall, we find that a monetary innovation brings a decline of 30 basis point of GDP, this result is almost invariant across both prior and identification technique.

Suggested Citation

  • Carlo Migliardo, 2010. "Monetary Policy Transmission in Italy: A BVAR Analysis with Sign Restriction," Czech Economic Review, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, vol. 4(2), pages 139-167, June.
    • Handle: RePEc:fau:aucocz:au2010_139
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    1. Bagliano, Fabio C. & Favero, Carlo A., 1999. "Information from financial markets and VAR measures of monetary policy," European Economic Review, Elsevier, vol. 43(4-6), pages 825-837, April.
    2. Rafiq, M.S. & Mallick, S.K., 2008. "The effect of monetary policy on output in EMU3: A sign restriction approach," Journal of Macroeconomics, Elsevier, vol. 30(4), pages 1756-1791, December.
    3. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    4. Giuseppe De Arcangelis & Giorgio Di Giorgio, 1999. "Monetary policy shocks and transmission in Italy: A VAR analysis," Economics Working Papers 446, Department of Economics and Business, Universitat Pompeu Fabra.
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    Cited by:

    1. Spulbăr Cristi & Niţoi Mihai, 2013. "Monetary Policy Transmission Mechanism in Romania Over the Period 2001 to 2012: A Bvar Analysis," Scientific Annals of Economics and Business, Sciendo, vol. 60(2), pages 1-12, December.
    2. Pavel Vidal & Gilberto Ramírez & Lya Paola Sierra, 2018. "¿Por qué el Valle del Cauca ha crecido más que el promedio nacional? Un análisis regional de los ciclos y los choques económicos," Working Papers 33, Faculty of Economics and Management, Pontificia Universidad Javeriana Cali.
    3. João Tovar Jalles, 2019. "Monetary Aggregates and Macroeconomic Performance: The Portuguese Escudo, 1911–1999," International Economic Journal, Taylor & Francis Journals, vol. 33(4), pages 719-740, October.
    4. Dedu, Vasile & Stoica, Tiberiu, 2014. "The Impact of Monetaru Policy on the Romanian Economy," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(2), pages 71-86, June.
    5. Margarit Monica-Ionelia, 2022. "Using The Bayesian Var In Monetary Policy Analysis: A Literature Review," Annals - Economy Series, Constantin Brancusi University, Faculty of Economics, vol. 1, pages 212-216, February.
    6. Bhattacharya, Rudrani & Tripathi, Shruti & Chowdhury, Sahana Roy, 2019. "Financial structure, institutional quality and monetary policy transmission: A Meta-Analysis," Working Papers 19/274, National Institute of Public Finance and Policy.
    7. Gerti Shijaku, 2015. "The Macroeconomic Pass-through Effects of Monetary Policy through Sign Restrictions Approach: In the Case of Albania," IHEID Working Papers 11-2015, Economics Section, The Graduate Institute of International Studies.
    8. Rossi, Jose Luiz & Delmondes de Carvalho Rossi, Marina & Carvalho Cunha, Daniel, 2019. "Transmission of monetary policy through the wealth channel in Brazil: Does the type of asset matter?," Research in International Business and Finance, Elsevier, vol. 50(C), pages 279-293.
    9. Francisco J. S. Rocha & Marcos R. V. Magalhaes & Ã tila Amaral Brilhante, 2022. "A BVAR Analysis on Channels of Monetary Policy Transmission in Brazil," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 14(3), pages 1-19, February.
    10. Baharudin, Azfar Hilmi, 2018. "A Bayesian Vector Autoregressive Analysis of Price and Industrial Shocks on the Malaysian Economy," Jurnal Ekonomi Malaysia, Faculty of Economics and Business, Universiti Kebangsaan Malaysia, vol. 52(3), pages 191-204.

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    Keywords

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    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • 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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