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

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

Abstract

To evaluate the evolution of the macro-economy under alternative assumptions on monetary policy, it suffices, under weak structural assumptions, to know the causal effects of monetary shocks on macroeconomic outcomes. The existing empirical literature estimates the effects of monetary shocks to the short end of the yield curve, thus allowing the evaluation of counterfactuals that change assumptions on near-term policy. If the contemplated policy changes are instead more persistent, then model structure becomes necessary, for one sole purpose: to extrapolate from the estimated short-end effects to those of policy shocks further out on the yield curve. Among popular models of monetary policy transmission, market incompleteness (i.e., “HANK”) does not change this extrapolation 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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    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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