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Using measures of expectations to identify the effects of a monetary policy shock

  • Allan D. Brunner

This paper considers an alternative econometric approach to the VAR methodology for identifying and estimating the effects of monetary policy shocks. The alternative approach incorporates available measures of market participants' expectations of economic variables in order to calculate economic innovations to those variables. In general, expectations measures should provide important additional information relative to a standard VAR analysis, since market participants presumably use a much richer information set than that assumed in a typical VAR model. The resulting innovations are easily incorporated in a VAR-like framework. ; The empirical results are quite surprising. First, when expectations are incorporated, the variance of all innovations is reduced substantially. Second, innovations to the federal funds rate derived using the alternative approach are only somewhat correlated with their VAR counterparts, while innovations to other economic variables are essentially uncorrelated. Still, monetary policy shocks derived using both approaches are still somewhat correlated, however, since innovations to prices and economic activity explain only a small fraction of innovations to the federal funds rate. As a consequence, the impulse responses of economic variables to the two sets of monetary policy shocks have remarkably similar properties.

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File URL: http://www.federalreserve.gov/pubs/ifdp/1996/537/default.htm
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File URL: http://www.federalreserve.gov/pubs/ifdp/1996/537/ifdp537.pdf
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Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series International Finance Discussion Papers with number 537.

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Date of creation: 1996
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Handle: RePEc:fip:fedgif:537
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  1. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-47, December.
  2. Christopher A. Sims, 1986. "Are forecasting models usable for policy analysis?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 2-16.
  3. Robert J. Barro, 1976. "Unanticipated Money Growth and Unemployment in the United States," Working Papers 234, Queen's University, Department of Economics.
  4. Lawrence J. Christiano & Martin Eichenbaum, 1992. "Liquidity effects, monetary policy and the business cycle," Working Paper Series, Macroeconomic Issues 92-15, Federal Reserve Bank of Chicago.
  5. Barro, Robert J., 1978. "Unanticipated Money, Output, and the Price Level in the United States," Scholarly Articles 3450988, Harvard University Department of Economics.
  6. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1994. "Identification and the effects of monetary policy shocks," Working Paper Series, Macroeconomic Issues 94-7, Federal Reserve Bank of Chicago.
  7. Ben S. Bernanke & Alan S. Blinder, 1989. "The federal funds rate and the channels of monetary transmission," Working Papers 89-10, Federal Reserve Bank of Philadelphia.
  8. Blanchard, Olivier Jean & Quah, Danny, 1989. "The Dynamic Effects of Aggregate Demand and Supply Disturbances," American Economic Review, American Economic Association, vol. 79(4), pages 655-73, September.
  9. Ben S. Bernanke, 1986. "Alternative Explanations of the Money-Income Correlation," NBER Working Papers 1842, National Bureau of Economic Research, Inc.
  10. Allan D. Brunner, 1994. "The federal funds rate and the implementation of monetary policy: estimating the Federal Reserve's reaction function," International Finance Discussion Papers 466, Board of Governors of the Federal Reserve System (U.S.).
  11. 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.
  12. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
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