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How Robust Are SVARs at Measuring Monetary Policy in Small Open Economies?

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  • Carrillo Julio A.
  • Elizondo Rocío

Abstract

We study the ability of exclusion and sign restrictions to measure monetary policy shocks in small open economies. Our Monte Carlo experiments show that sign restrictions systematically overshoot inflation responses to the said shock, so we propose to add prior information to limit the number of economically implausible responses. This modified procedure robustly recovers the transmission of the shock, whereas exclusion restrictions show large sensitivity to the assumed monetary transmission mechanism of the model and the set of foreign variables included in the VAR. An application with Mexican data supports our findings.

Suggested Citation

  • Carrillo Julio A. & Elizondo Rocío, 2015. "How Robust Are SVARs at Measuring Monetary Policy in Small Open Economies?," Working Papers 2015-18, Banco de México.
  • Handle: RePEc:bdm:wpaper:2015-18
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    File URL: http://www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BD950F13D-A834-A29A-7B39-069D000BDD0F%7D.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Donayre, Luiggi & Panovska, Irina, 2016. "State-dependent exchange rate pass-through behavior," Journal of International Money and Finance, Elsevier, vol. 64(C), pages 170-195.
    2. Capistrán Carlos & Chiquiar Daniel & Hernández Juan R., 2017. "Identifying Dornbusch's Exchange Rate Overshooting with Structural VECs: Evidence from Mexico," Working Papers 2017-11, Banco de México.

    More about this item

    Keywords

    Exclusion Restrictions; Sign Restrictions; Small Open Economy; Monetary Policy Shock.;

    JEL classification:

    • 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
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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