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Monetary Policy Shocks and Narrative Restrictions: Rules Matter

Author

Listed:
  • Efrem Castelnuovo
  • Giovanni Pellegrino
  • Laust L. Særkjær

Abstract

Imposing restrictions on policy rule coefficients in vector autoregressive (VAR) models enhances the identification of monetary policy shocks obtained with sign and narrative restrictions. Monte Carlo simulations and empirical analyses for the United States and the Euro area support this result. For the U.S., adding policy coefficient restrictions yields a larger and more precise short-run output response and more stable Phillips multiplier estimates. Heterogeneity in output responses reflects variation in systematic policy reactions to output. In the Euro area, policy coefficient restrictions sharpen the identification of corporate bond spread responses to monetary policy shocks.

Suggested Citation

  • Efrem Castelnuovo & Giovanni Pellegrino & Laust L. Særkjær, 2025. "Monetary Policy Shocks and Narrative Restrictions: Rules Matter," CESifo Working Paper Series 12246, CESifo.
    • Handle: RePEc:ces:ceswps:_12246
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    References listed on IDEAS

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    1. Brennan Connor M. & Jacobson Margaret M. & Matthes Christian & Walker Todd B., 2025. "Monetary Policy Shocks: Data or Methods?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 25(2), pages 595-659.
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    6. Arias, Jonas E. & Caldara, Dario & Rubio-Ramírez, Juan F., 2019. "The systematic component of monetary policy in SVARs: An agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 1-13.
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    Keywords

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    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
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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