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The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure

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Abstract

This paper studies the effects of monetary policy shocks using structural VARs. We achieve identification by imposing sign and zero restrictions on the systematic component of monetary policy. Importantly, our identification scheme does not restrict the contemporaneous response of output to a monetary policy shock. Using data for the period 1965–2007, we consistently find that an increase in the federal funds rate induces a contraction in output. We also find that monetary policy shocks are contractionary during the Great Moderation. Finally, we show that the identification strategy in Uhlig (2005), which imposes sign restrictions on the impulse response functions to a monetary policy shock, does not satisfy our restrictions on the systematic component of monetary policy with high posterior probability.

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  • Arias, Jonas E. & Caldara, Dario & Rubio-Ramirez, Juan F., 2016. "The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure," FRB Atlanta Working Paper 2016-15, Federal Reserve Bank of Atlanta, revised 01 Oct 2017.
  • Handle: RePEc:fip:fedawp:2016-15
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    References listed on IDEAS

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    1. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, pages 381-419.
    2. Waggoner, Daniel F. & Zha, Tao, 2003. "Likelihood preserving normalization in multiple equation models," Journal of Econometrics, Elsevier, vol. 114(2), pages 329-347, June.
    3. Christiano, Lawrence J & Eichenbaum, Martin & Evans, Charles, 1996. "The Effects of Monetary Policy Shocks: Evidence from the Flow of Funds," The Review of Economics and Statistics, MIT Press, pages 16-34.
    4. Jonas E. Arias & Juan Rubio-Ramirez & Daniel F. Waggoner, 2013. "Inference Based on SVARs Identied with Sign and Zero Restrictions: Theory and Applications," Working Papers 2013-24, FEDEA.
    5. G. Peersman & W. Wagner, 2014. "Shocks to Bank Lending, Risk-Taking, Securitization, and their Role for U.S. Business Cycle Fluctuations," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 14/874, Ghent University, Faculty of Economics and Business Administration.
    6. Juan F. Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2010. "Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference," Review of Economic Studies, Oxford University Press, vol. 77(2), pages 665-696.
    7. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters,in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
    8. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco.
    9. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    10. Michael T. Belongia & Peter N. Ireland, 2015. "Interest Rates and Money in the Measurement of Monetary Policy," Journal of Business & Economic Statistics, Taylor & Francis Journals, pages 255-269.
    11. repec:oup:restud:v:84:y:2017:i:3:p:1015-1040. is not listed on IDEAS
    12. Dario Caldara & Christophe Kamps, 2017. "The Analytics of SVARs: A Unified Framework to Measure Fiscal Multipliers," Review of Economic Studies, Oxford University Press, vol. 84(3), pages 1015-1040.
    13. Andrew Binning, 2013. "Underidentified SVAR models: A framework for combining short and long-run restrictions with sign-restrictions," Working Paper 2013/14, Norges Bank.
    14. Henry W. Chappell, Jr. & Rob Roy McGregor & Todd A. Vermilyea, 2005. "Committee Decisions on Monetary Policy: Evidence from Historical Records of the Federal Open Market Committee," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262033305, January.
    15. Paul Beaudry & Deokwoo Nam & Jian Wang, 2011. "Do Mood Swings Drive Business Cycles and is it Rational?," NBER Working Papers 17651, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Thorsten Drautzburg & Pooyan Amir-Ahmadi, 2017. "Identification through Heterogeneity," 2017 Meeting Papers 1087, Society for Economic Dynamics.
    2. Gaston Navarro & Axelle Ferriere, 2016. "The Heterogeneous Effects of Government Spending: It's All About Taxes," 2016 Meeting Papers 1286, Society for Economic Dynamics.
    3. Thorsten Drautzburg, 2014. "A Narrative Approach to a Fiscal DSGE Model," 2014 Meeting Papers 791, Society for Economic Dynamics.
    4. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, Elsevier.
    5. Michael T. Belongia & Peter N. Ireland, 2016. "Targeting Constant Money Growth at the Zero Lower Bound," Boston College Working Papers in Economics 913, Boston College Department of Economics.
    6. Castelnuovo, Efrem, 2016. "Modest macroeconomic effects of monetary policy shocks during the great moderation: An alternative interpretation," Journal of Macroeconomics, Elsevier, pages 300-314.
    7. Bermperoglou, Dimitrios & Pappa, Evi & Vella, Eugenia, 2017. "The government wage bill and private activity," Journal of Economic Dynamics and Control, Elsevier, pages 21-47.
    8. Kocięcki, Andrzej, 2017. "Fully Bayesian Analysis of SVAR Models under Zero and Sign Restrictions," MPRA Paper 81094, University Library of Munich, Germany.
    9. Emanuele Bacchiocchi & Efrem Castelnuovo & Luca Fanelli, 2014. "Gimme a break! Identification and estimation of the macroeconomic effects of monetary policy shocks in the U.S," "Marco Fanno" Working Papers 0181, Dipartimento di Scienze Economiche "Marco Fanno".
    10. Amir-Ahmadi, Pooyan & Drautzburg, Thorsten, 2017. "Identification Through Heterogeneity," Working Papers 17-11, Federal Reserve Bank of Philadelphia.
    11. Edward Herbst & Dario Caldara, 2015. "Monetary Policy, Credit Spreads, and Business Cycle Fluctuations," 2015 Meeting Papers 899, Society for Economic Dynamics.
    12. Marco Capasso & Alessio Moneta, 2016. "Macroeconomic responses to an independent monetary policy shock: a (more) agnostic identification procedure," LEM Papers Series 2016/36, Laboratory of Economics and Management (LEM), Sant'Anna School of Advanced Studies, Pisa, Italy.
    13. Burriel, Pablo & Galesi, Alessandro, 2018. "Uncovering the heterogeneous effects of ECB unconventional monetary policies across euro area countries," European Economic Review, Elsevier, vol. 101(C), pages 210-229.
    14. Robin Braun & Ralf Brüggemann, 2017. "Identification of SVAR Models by Combining Sign Restrictions With External Instruments," Working Paper Series of the Department of Economics, University of Konstanz 2017-07, Department of Economics, University of Konstanz.
    15. Ana María Chirinos-Leañez & Carolina Pagliacci, 2017. "Credit Supply in Venezuela: A Non-Conventional Bank Lending Channel?," IDB Publications (Working Papers) 8256, Inter-American Development Bank.

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    Keywords

    SVARs; monetary policy shocks; systematic component of monetary policy;

    JEL classification:

    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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