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Monetary Policy Neutrality: Sign Restrictions Go to Monte Carlo

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  • Efrem Castelnuovo

    () (University of Padova)

Abstract

A new-Keynesian DSGE model in which contractionary monetary policy shocks generate recessions is estimated with U.S. data. It is then used in a Monte Carlo exercise to generate artificial data with which VARs are estimated. VAR monetary policy shocks are identified via sign restrictions. Our VAR impulse responses replicate UhligÕs (2005, Journal of Monetary Economics) evidence on unexpected interest rate hikes having ambiguous effects on output. The mismatch between the true (DSGE-consistent) responses and those produced with sign-restriction VARs is shown to be due to the low relative strength of the signal of the monetary policy shock. We conclude that UhligÕs (2005) finding is not inconsistent with monetary policy non-neutrality.

Suggested Citation

  • Efrem Castelnuovo, 2012. "Monetary Policy Neutrality: Sign Restrictions Go to Monte Carlo," "Marco Fanno" Working Papers 0151, Dipartimento di Scienze Economiche "Marco Fanno".
  • Handle: RePEc:pad:wpaper:0151
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    Cited by:

    1. Matteo Barigozzi & Antonio M. Conti & Matteo Luciani, 2014. "Do Euro Area Countries Respond Asymmetrically to the Common Monetary Policy?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 76(5), pages 693-714, October.

    More about this item

    Keywords

    Monetary policy shocks; VARs; sign restrictions; dynamic stochastic general equilibrium models; monetary neutrality.;

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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