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

Listed author(s):
  • 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
Handle: RePEc:ecb:ecbwps:20060586
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  1. 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.
  2. 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.
  3. Lawrence J. Christiano & Martin Eichenbaum & Robert Vigfusson, 2003. "What Happens After a Technology Shock?," NBER Working Papers 9819, National Bureau of Economic Research, Inc.
  4. 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.
  5. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September.
  6. Beyer, Andreas & Farmer, Roger E. A., 2003. "Identifying the monetary transmission mechanism using structural breaks," Working Paper Series 0275, European Central Bank.
  7. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper Series WP-01-08, Federal Reserve Bank of Chicago.
  8. 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.
  9. Benhabib, J. & Farmer, R.E.A., 1999. "The Monetary Transmission Mechanism," Economics Working Papers eco99/35, European University Institute.
  10. Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez & Thomas J. Sargent, 2005. "A, B, C’s (And D’s) For Understanding VARS," PIER Working Paper Archive 05-018, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  11. repec:fth:starer:9613 is not listed on IDEAS
  12. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 2008. "Are Structural VARs with Long-Run Restrictions Useful in Developing Business Cycle Theory?," NBER Working Papers 14430, National Bureau of Economic Research, Inc.
  13. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  14. Roger E. A. Farmer & Andreas Beyer, 2004. "On the Indeterminacy of New Keynesian Economics," 2004 Meeting Papers 187, Society for Economic Dynamics.
  15. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
  16. 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.
  17. Canova, Fabio & Sala, Luca, 2009. "Back to square one: Identification issues in DSGE models," Journal of Monetary Economics, Elsevier, vol. 56(4), pages 431-449, May.
  18. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2005. "On the Fit and Forecasting Performance of New Keynesian Models," CEPR Discussion Papers 4848, C.E.P.R. Discussion Papers.
  19. Beyer, Andreas & Farmer, Roger E A, 2003. "On the Indeterminacy of Determinacy and Indeterminacy," CEPR Discussion Papers 4101, C.E.P.R. Discussion Papers.
  20. Keating, John W., 1990. "Identifying VAR models under rational expectations," Journal of Monetary Economics, Elsevier, vol. 25(3), pages 453-476, June.
  21. 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.
  22. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  23. 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.
  24. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
  25. Hans M. Amman & David A. Kendrick, . "Computational Economics," Online economics textbooks, SUNY-Oswego, Department of Economics, number comp1.
  26. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1.
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