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Do measures of monetary policy in a VAR make sense?

Author

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  • Glenn D. Rudebusch

Abstract

No. In many VARs, monetary policy shocks are identified with the least squares residuals from a regression of the federal funds rate on an assortment of variables. Such regressions appear to be structurally fragile and are at odds with other evidence on the nature of the Fed's reaction function; furthermore, the residuals from these regressions have little correlation with funds rate shocks that are derived from forward-looking financial markets.

Suggested Citation

  • Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco, revised 1996.
  • Handle: RePEc:fip:fedfap:96-05
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    Citations

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    Cited by:

    1. Charles L. Evans & Kenneth N. Kuttner, 1998. "Can VARs describe monetary policy?," Research Paper 9812, Federal Reserve Bank of New York.
    2. 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.
    3. Soderlind, Paul & Svensson, Lars, 1997. "New techniques to extract market expectations from financial instruments," Journal of Monetary Economics, Elsevier, vol. 40(2), pages 383-429, October.
    4. Andreas Worms, 2003. "Interbank Relationships and the Credit Channel in Germany," Empirica, Springer;Austrian Institute for Economic Research;Austrian Economic Association, vol. 30(2), pages 179-198, June.
    5. Benoît Mojon, 1997. "Looking for French Monetary Policy," Working Papers 1997-10, CEPII research center.
    6. Muscatelli, V Anton & Tirelli, Patrizio & Trecroci, Carmine, 2002. "Does Institutional Change Really Matter? Inflation Targets, Central Bank Reform and Interest Rate Policy in the OECD Countries," Manchester School, University of Manchester, vol. 70(4), pages 487-527, Special I.
    7. Worms, Andreas, 2001. "The reaction of bank lending to monetary policy measures in Germany," Working Paper Series 0096, European Central Bank.
    8. Monticello, Carlo & Tristani, Oreste, 1999. "What does the single monetary policy do? A SVAR benchmark for the European Central Bank," Working Paper Series 0002, European Central Bank.
    9. V. Anton Muscatelli & Patrizio Tirelli & Carmine Trecroci, 1998. "Institutional Change, Inflation Targeting and the Stability of Interest Rate Reaction Functions," Working Papers 9815, Business School - Economics, University of Glasgow, revised Aug 1998.
    10. O. David Gulley & Jahangir Sultan, 2003. "The link between monetary policy and stock and bond markets: evidence from the federal funds futures contract," Applied Financial Economics, Taylor & Francis Journals, vol. 13(3), pages 199-209.
    11. Bhundia, Ashok J. & Chadha, Jagjit S., 1998. "The information content of 3-month Sterling futures," Economics Letters, Elsevier, vol. 61(2), pages 209-214, November.
    12. Bagliano, Fabio C. & Favero, Carlo A., 1999. "Information from financial markets and VAR measures of monetary policy," European Economic Review, Elsevier, vol. 43(4-6), pages 825-837, April.
    13. Philippe Bacchetta & Fernando Ballabriga, 2000. "The impact of monetary policy and banks' balance sheets: some international evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 10(1), pages 15-26.
    14. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.), revised 1998.
    15. María-Dolores, Ramón, 1999. "Variaciones en el tipo de intervención del banco de España: Un análisis mediante un enfoque alternativo," DE - Documentos de Trabajo. Economía. DE 3895, Universidad Carlos III de Madrid. Departamento de Economía.
    16. Nolan, Charles, 2002. "Monetary Stabilisation Policy in a Monetary Union: Some Simple Analytics," Scottish Journal of Political Economy, Scottish Economic Society, vol. 49(2), pages 196-215, May.
    17. Joe Ganley & Chris Salmon, 1997. "The Industrial Impact of Monetary Policy Shocks: Some Stylised Facts," Bank of England working papers 68, Bank of England.
    18. Jan Gottschalk & Willem Van Zandweghe, 2003. "Do Bivariate SVAR Models with Long-Run Identifying Restrictions Yield Reliable Results? An Investigation into the Case of Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(I), pages 55-81, March.
    19. Imke Brüggemann, 2003. "Measuring Monetary Policy in Germany: A Structural Vector Error Correction Approach," German Economic Review, Verein für Socialpolitik, vol. 4, pages 307-339, August.
    20. Mark S Astley & Anthony Garratt, 1998. "Exchange rates and prices: sources of sterling real exchange rate fluctuations 1973-94," Bank of England working papers 85, Bank of England.
    21. Thornton, Daniel L., 2001. "The Federal Reserve's operating procedure, nonborrowed reserves, borrowed reserves and the liquidity effect," Journal of Banking & Finance, Elsevier, vol. 25(9), pages 1717-1739, September.
    22. Hilde C. Bjørnland, 1998. "Economic Fluctuations in a Small Open Economy - Real versus Nominal Shocks," Discussion Papers 215, Statistics Norway, Research Department.
    23. Giuseppe De Arcangelis & Giorgio Di Giorgio, 1999. "Monetary policy shocks and transmission in Italy: A VAR analysis," Economics Working Papers 446, Department of Economics and Business, Universitat Pompeu Fabra.
    24. Magdalena Petrovska & Ljupka Georgievska, 2015. "Alternative Indicator of Monetary Policy Stance for Macedonia," Working Papers 2015-01, National Bank of the Republic of North Macedonia.

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