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Evaluating Monetary Policy Counterfactuals: When Do We Need Structural Models?

Author

Listed:
  • Tomás E. Caravello
  • Alisdair McKay
  • Christian K. Wolf

Abstract

We give conditions under which knowledge of the effects of monetary policy shocks suffices to evaluate policy counterfactuals that change not just the monetary rule, but also the nature of equilibrium selection. For example, the effects of monetary policy shocks in a regime of monetary dominance can be used to evaluate counterfactual outcomes even under a regime switch to fiscal dominance. Since the empirical literature delivers the causal effects of short-lived monetary shocks, the sole remaining role of model structure in evaluating such counterfactuals is thus to extrapolate from the effects of transitory to those of more persistent policy rate changes. Among popular models of monetary policy transmission, household heterogeneity (as in the burgeoning “HANK” literature) does not change this extrapolation very much, while behavioral frictions do.

Suggested Citation

  • Tomás E. Caravello & Alisdair McKay & Christian K. Wolf, 2024. "Evaluating Monetary Policy Counterfactuals: When Do We Need Structural Models?," NBER Working Papers 32988, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:32988
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    More about this item

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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