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A method to generate structural impulse-responses for measuring the effects of shocks in structural macro models

  • Beyer, Andreas
  • Farmer, Roger E. A.

We develop a technique for analyzing the response dynamics of economic variables to structural shocks in linear rational expectations models. Our work differs fromstandard SVARs since we allow expectations of future variables to enter structural equations. We show how to estimate the variance-covariance matrix of fundamental and non-fundamental shocks and we construct point estimates and confidence bounds for impulse response functions. Our technique can handle both determinate and indeterminate equilibria. We provide an application to U.S. monetary policy under pre and post Volcker monetary policy rules. JEL Classification: C39, C62, D51, E52, E58

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Paper provided by European Central Bank in its series Working Paper Series with number 0586.

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Date of creation: Feb 2006
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Handle: RePEc:ecb:ecbwps:20060586
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  1. Benhabib, Jess & Farmer, Roger E A, 1996. "The Monetary Transmission Mechanism," CEPR Discussion Papers 1404, C.E.P.R. Discussion Papers.
  2. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2007. "Are structural VARs with long-run restrictions useful in developing business cycle theory?," Staff Report 364, Federal Reserve Bank of Minneapolis.
  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. Beyer, Andreas & Farmer, Roger E. A., 2003. "On the indeterminacy of determinacy and indeterminacy," Working Paper Series 0277, European Central Bank.
  5. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
  6. Fabio Canova & Luca Sala, 2006. "Back to square one: identification issues in DSGE models," Computing in Economics and Finance 2006 196, Society for Computational Economics.
  7. Keating, John W., 1990. "Identifying VAR models under rational expectations," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 453-476, June.
  8. Jesús Fernández-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent & Mark Watson, 2006. "A,B,C's (and D's)'s for Understanding VARS," Levine's Bibliography 321307000000000646, UCLA Department of Economics.
  9. repec:fth:starer:9613 is not listed on IDEAS
  10. Beyer, Andreas & Farmer, Roger E A, 2004. "What We Don't Know About the Monetary Transmission Mechanism and Why We Don't Know It," CEPR Discussion Papers 4811, C.E.P.R. Discussion Papers.
  11. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Raf, 2005. "On the fit and forecasting performance of New-Keynesian models," Working Paper Series 0491, European Central Bank.
  12. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc.
  13. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  14. Linde, Jesper, 2005. "Estimating New-Keynesian Phillips curves: A full information maximum likelihood approach," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1135-1149, September.
  15. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, May.
  16. Andreas Beyer & Roger E. A. Farmer, 2004. "On the Indeterminacy of New-Keynesian Economics," Computing in Economics and Finance 2004 152, Society for Computational Economics.
  17. Karl Whelan & Jeremy Rudd, 2001. "New tests of the New-Keynesian Phillips Curve," Open Access publications 10197/249, School of Economics, University College Dublin.
  18. Beyer, Andreas & Farmer, Roger E A, 2003. "Identifying the Monetary Transmission Mechanism Using Structural Breaks," CEPR Discussion Papers 4106, C.E.P.R. Discussion Papers.
  19. Benhabib, Jess & Farmer, Roger E.A., 1999. "Indeterminacy and sunspots in macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 6, pages 387-448 Elsevier.
  20. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  21. Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1, December.
  22. Anderson, Evan W. & McGrattan, Ellen R. & Hansen, Lars Peter & Sargent, Thomas J., 1996. "Mechanics of forming and estimating dynamic linear economies," Handbook of Computational Economics, in: H. M. Amman & D. A. Kendrick & J. Rust (ed.), Handbook of Computational Economics, edition 1, volume 1, chapter 4, pages 171-252 Elsevier.
  23. Lubik, Thomas A. & Schorfheide, Frank, 2003. "Computing sunspot equilibria in linear rational expectations models," Journal of Economic Dynamics and Control, Elsevier, vol. 28(2), pages 273-285, November.
  24. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
  25. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
  26. Lawrence J. Christiano & Martin Eichenbaum & Robert J. Vigfusson, 2003. "What happens after a technology shock?," International Finance Discussion Papers 768, Board of Governors of the Federal Reserve System (U.S.).
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