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Monetary Policy Shocks and Narrative Restrictions: Rules Matter

Author

Listed:
  • Efrem Castelnuovo

    (University of Padua)

  • Giovanni Pellegrino

    (University of Padua)

  • Laust L. Saerkjaer

    (Aarhus University)

Abstract

Imposing restrictions on policy rule coefficients in vector autoregressive (VAR) models enhances the identification of monetary policy shocks obtained with sign and narrative restrictions. Monte Carlo simulations and empirical analyses for the United States and the Euro area sup- port this result. For the U.S., adding policy coefficient restrictions yields a larger and more precise short-run output response and more stable Phillips multiplier estimates. Heterogeneity in output responses reflects variation in systematic policy reactions to output. In the Euro area, policy coefficient restrictions sharpen the identification of corporate bond spread responses to monetary policy shocks.

Suggested Citation

  • Efrem Castelnuovo & Giovanni Pellegrino & Laust L. Saerkjaer, 2025. "Monetary Policy Shocks and Narrative Restrictions: Rules Matter," "Marco Fanno" Working Papers 0328, Dipartimento di Scienze Economiche "Marco Fanno".
    • Handle: RePEc:pad:wpaper:0328
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