IDEAS home Printed from https://ideas.repec.org/p/fip/fedawp/2016-15.html
   My bibliography  Save this paper

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

Author

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.

Suggested Citation

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

    Download full text from publisher

    File URL: https://www.frbatlanta.org/-/media/documents/research/publications/wp/2016/15a-the-systematic-component-of-monetary-policy-in-SVARs-2017-10-12.pdf
    File Function: Full text
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Christina D. Romer & David H. Romer, 2004. "A New Measure of Monetary Shocks: Derivation and Implications," American Economic Review, American Economic Association, vol. 94(4), pages 1055-1084, September.
    2. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    3. Waggoner, Daniel F. & Zha, Tao, 2003. "Likelihood preserving normalization in multiple equation models," Journal of Econometrics, Elsevier, vol. 114(2), pages 329-347, June.
    4. 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, vol. 78(1), pages 16-34, February.
    5. Leeper, Eric M. & Zha, Tao, 2003. "Modest policy interventions," Journal of Monetary Economics, Elsevier, vol. 50(8), pages 1673-1700, November.
    6. 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.
    7. Ben S. Bernanke & Mark Gertler & Mark Watson, 1997. "Systematic Monetary Policy and the Effects of Oil Price Shocks," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 28(1), pages 91-157.
    8. 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.
    9. Inoue, Atsushi & Kilian, Lutz, 2013. "Inference on impulse response functions in structural VAR models," Journal of Econometrics, Elsevier, vol. 177(1), pages 1-13.
    10. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
    11. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    12. Baumeister, Christiane & Benati, Luca, 2010. "Unconventional monetary policy and the great recession - Estimating the impact of a compression in the yield spread at the zero lower bound," Working Paper Series 1258, European Central Bank.
    13. Ben S. Bernanke & Julio J. Rotemberg (ed.), 1997. "NBER Macroeconomics Annual 1997," MIT Press Books, The MIT Press, edition 1, volume 1, number 026252242x.
    14. Andrew Mountford & Harald Uhlig, 2009. "What are the effects of fiscal policy shocks?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 24(6), pages 960-992.
    15. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    16. 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.
    17. Ben S. Bernanke & Ilian Mihov, 1998. "Measuring Monetary Policy," The Quarterly Journal of Economics, Oxford University Press, vol. 113(3), pages 869-902.
    18. 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, vol. 33(2), pages 255-269, April.
    19. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    20. Leeper, Eric M. & Gordon, David B., 1992. "In search of the liquidity effect," Journal of Monetary Economics, Elsevier, vol. 29(3), pages 341-369, June.
    21. Bagliano, Fabio C. & Favero, Carlo A., 1998. "Measuring monetary policy with VAR models: An evaluation," European Economic Review, Elsevier, vol. 42(6), pages 1069-1112, June.
    22. Lutz Kilian & Daniel P. Murphy, 2012. "Why Agnostic Sign Restrictions Are Not Enough: Understanding The Dynamics Of Oil Market Var Models," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1166-1188, October.
    23. Markus K. Brunnermeier, 2009. "Deciphering the Liquidity and Credit Crunch 2007-2008," Journal of Economic Perspectives, American Economic Association, vol. 23(1), pages 77-100, Winter.
    24. 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.
    25. Mark Gertler & Peter Karadi, 2015. "Monetary Policy Surprises, Credit Costs, and Economic Activity," American Economic Journal: Macroeconomics, American Economic Association, vol. 7(1), pages 44-76, January.
    26. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
    27. 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.
    28. Jonas E. Arias & Juan F. Rubio‐Ramírez & Daniel F. Waggoner, 2018. "Inference Based on Structural Vector Autoregressions Identified With Sign and Zero Restrictions: Theory and Applications," Econometrica, Econometric Society, vol. 86(2), pages 685-720, March.
    29. Sims, Christopher A. & Zha, Tao, 2006. "Does Monetary Policy Generate Recessions?," Macroeconomic Dynamics, Cambridge University Press, vol. 10(2), pages 231-272, April.
    30. Faust, Jon, 1998. "The robustness of identified VAR conclusions about money," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 49(1), pages 207-244, December.
    31. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    32. Ben S. Bernanke & Julio J. Rotemberg, 1997. "NBER Macroeconomics Annual 1997, Volume 12," NBER Books, National Bureau of Economic Research, Inc, number bern97-1, March.
    33. Emanuel Mönch & Harald Uhlig, 2005. "Towards a Monthly Business Cycle Chronology for the Euro Area," Journal of Business Cycle Measurement and Analysis, OECD Publishing, Centre for International Research on Economic Tendency Surveys, vol. 2005(1), pages 43-69.
    34. Olivier Coibion, 2012. "Are the Effects of Monetary Policy Shocks Big or Small?," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 1-32, April.
    35. Julio J. 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.
    36. Christiane Baumeister & James D. Hamilton, 2015. "Sign Restrictions, Structural Vector Autoregressions, and Useful Prior Information," Econometrica, Econometric Society, vol. 83(5), pages 1963-1999, September.
    37. Glenn D. Rudebusch, 2006. "Monetary Policy Inertia: Fact or Fiction?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
    38. Andrew Binning, 2013. "Underidentified SVAR models: A framework for combining short and long-run restrictions with sign-restrictions," Working Paper 2013/14, Norges Bank.
    39. Barakchian, S. Mahdi & Crowe, Christopher, 2013. "Monetary policy matters: Evidence from new shocks data," Journal of Monetary Economics, Elsevier, vol. 60(8), pages 950-966.
    40. Sims, Christopher A, 1972. "Money, Income, and Causality," American Economic Review, American Economic Association, vol. 62(4), pages 540-552, September.
    41. 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.
    42. 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.
    43. 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.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Arias, Jonas & Caldara, Dario & Rubio-Ramírez, Juan Francisco, 2016. "The Systematic Component of Monetary Policy in SVARs: An Agnostic Identi," CEPR Discussion Papers 11674, C.E.P.R. Discussion Papers.
    2. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
    3. 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.
    4. Baumeister, Christiane & Hamilton, James D., 2018. "Inference in structural vector autoregressions when the identifying assumptions are not fully believed: Re-evaluating the role of monetary policy in economic fluctuations," Journal of Monetary Economics, Elsevier, vol. 100(C), pages 48-65.
    5. Uhlig, Harald, 2005. "What are the effects of monetary policy on output? Results from an agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 52(2), pages 381-419, March.
    6. 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.
    7. Stock, J.H. & Watson, M.W., 2016. "Dynamic Factor Models, Factor-Augmented Vector Autoregressions, and Structural Vector Autoregressions in Macroeconomics," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 415-525, Elsevier.
    8. Uhrin, Gábor B. & Herwartz, Helmut, 2016. "Monetary policy shocks, set-identifying restrictions, and asset prices: A benchmarking approach for analyzing set-identified models," University of Göttingen Working Papers in Economics 295, University of Goettingen, Department of Economics.
    9. Herwartz, Helmut & Rohloff, Hannes & Wang, Shu, 2020. "Proxy SVAR identification of monetary policy shocks: MonteCarlo evidence and insights for the US," University of Göttingen Working Papers in Economics 404, University of Goettingen, Department of Economics.
    10. Antolín-Díaz, Juan & Petrella, Ivan & Rubio-Ramírez, Juan F., 2021. "Structural scenario analysis with SVARs," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 798-815.
    11. Goto, Shingo, 2000. "The Fed's Effect on Excess Returns and Inflation is Much Bigger Than You Think," University of California at Los Angeles, Anderson Graduate School of Management qt04f1z5hb, Anderson Graduate School of Management, UCLA.
    12. Britta Gehrke & Fang Yao, 2016. "Persistence and volatility of real exchange rates: the role of supply shocks revisited," Reserve Bank of New Zealand Discussion Paper Series DP2016/02, Reserve Bank of New Zealand.
    13. Cosmas Dery & Apostolos Serletis, 2021. "Disentangling the Effects of Uncertainty, Monetary Policy and Leverage Shocks on the Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(5), pages 1029-1065, October.
    14. Chen, Zhengyang, 2019. "The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission," MPRA Paper 96339, University Library of Munich, Germany.
    15. John W. Keating & Logan J. Kelly & A. Lee Smith & Victor J. Valcarcel, 2019. "A Model of Monetary Policy Shocks for Financial Crises and Normal Conditions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 51(1), pages 227-259, February.
    16. Dario Caldara & Edward Herbst, 2019. "Monetary Policy, Real Activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs," American Economic Journal: Macroeconomics, American Economic Association, vol. 11(1), pages 157-192, January.
    17. Rüth, Sebastian K., 2020. "Shifts in monetary policy and exchange rate dynamics: Is Dornbusch's overshooting hypothesis intact, after all?," Journal of International Economics, Elsevier, vol. 126(C).
    18. 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".
    19. Martin Feldkircher & Florian Huber, 2018. "Unconventional U.S. Monetary Policy: New Tools, Same Channels?," JRFM, MDPI, vol. 11(4), pages 1-31, October.
    20. Champagne, Julien & Sekkel, Rodrigo, 2018. "Changes in monetary regimes and the identification of monetary policy shocks: Narrative evidence from Canada," Journal of Monetary Economics, Elsevier, vol. 99(C), pages 72-87.

    More about this item

    Keywords

    SVARs; monetary policy shocks; systematic component of monetary policy;
    All these keywords.

    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

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedawp:2016-15. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: . General contact details of provider: https://edirc.repec.org/data/frbatus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Rob Sarwark (email available below). General contact details of provider: https://edirc.repec.org/data/frbatus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.