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Monetary policy shocks - a nonfundamental look at the data

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  • Klaeffling, Matt

Abstract

VAR studies of the effects of monetary policy on output suggest that a contractionary impulse results in a drawn-out, hump-shaped response of output. Standard structural economic models are generally not able to reproduce such a response. In this paper I look at nonfundamental representations that are observationally equivalent to a VAR. I find that the quantitative effect of a monetary policy shock on output might be much smaller and much more short-lived than the VAR studies suggest. I conclude that the apparent discrepancy between the VAR findings and standard structural models may be spurious and that the general tendency to append non-structural, ad hoc features to structural models should be questioned. JEL Classification: C12, E52

Suggested Citation

  • Klaeffling, Matt, 2003. "Monetary policy shocks - a nonfundamental look at the data," Working Paper Series 228, European Central Bank.
  • Handle: RePEc:ecb:ecbwps:2003228
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    Cited by:

    1. Richard Mash, 2004. "Optimising Microfoundations for Inflation Persistence," Economics Series Working Papers 183, University of Oxford, Department of Economics.
    2. Lucia Alessi & Matteo Barigozzi & Marco Capasso, 2007. "A Review of Nonfundamentalness and Identification in Structural VAR Models," LEM Papers Series 2007/22, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    3. Ascari, Guido & Rankin, Neil, 2007. "Perpetual youth and endogenous labor supply: A problem and a possible solution," Journal of Macroeconomics, Elsevier, pages 708-723.
    4. Klaeffling, Matt, 2003. "Macroeconomic modelling of monetary policy," Working Paper Series 257, European Central Bank.
    5. Catherine Fuss & Philip Vermeulen, 2008. "Firms' investment decisions in response to demand and price uncertainty," Applied Economics, Taylor & Francis Journals, vol. 40(18), pages 2337-2351.

    More about this item

    Keywords

    Blaschke matrices; monetary policy; non-fundamental representations; VAR models;

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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