Identifying Monetary Policy Shocks via Changes in Volatility

Identifying Monetary Policy Shocks via Changes in Volatility

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: I DENTIFYING M ONETARY P OLICY S HOCKS VIA C HANGES IN V OLATILITY M ARKKU L ANNE H ELMUT L UETKEPOHL CES IFO W ORKING P APER N O . 1744 C ATEGORY 10: E MPIRICAL AND T HEORETICAL M ETHODS J UNE 2006 An electronic version of the paper may be downloaded from the SSRN website: www.SSRN.com from the RePEc website: www.RePEc.org from the CESifo website: T www.CESifo-group.de T CESifo Working Paper No. 1744 I DENTIFYING M ONETARY P OLICY S HOCKS VIA C HANGES IN V OLATILITY Abstract A central issue of monetary policy analysis is the specification of monetary policy shocks. In a structural vector autoregressive setting there has been some controversy about which restrictions to use for identifying the shocks because standard theories do not provide enough information to fully identify monetary policy shocks. In fact, to compare different theories it would even be desirable to have over-identifying restrictions which would make statistical tests of different theories possible. It is pointed out that some progress towards over- identifying monetary policy shocks can be made by using specific data properties. In particular, it is shown that changes in the volatility of the shocks can be used for identification. Based on monthly US data from 1965-1996 different theories are tested and it is found that associating monetary policy shocks with shocks to nonborrowed reserves leads to a particularly strong rejection of the model whereas assuming that the Fed accommodates demand shocks to total reserves cannot be rejected. JEL Code: C32. Keywords: monetary policy, structural vector autoregressive analysis, vector autoregressive process, impulse responses. Markku Lanne University of Jyvskyl School of Business and Economics P.O. Box 35 40014 University of Jyvskyl Finland Helmut Ltkepohl Department of Economics European University Institute Via della Piazzuola 43 50133 Firenze Italy Helmut.luetkepohl@iue.it May 31, 2006 The first author acknowledges financial support from the Yrj Jahnsson Foundation. This research was done while he was a Jean Monnet Fellow in the Economics Department of the European University Institute. 1 Introduction Over the last two decades, a large literature has developed which evaluates monetary policy within a structural vector autoregressive (SVAR) frame- work (see, e.g., Christiano, Eichenbaum and Evans (1999), henceforth CEE). A central question in evaluating monetary policy is how to identify the mon- etary policy shocks. Various competing economic theories have been used to formulate restrictions which help in identifying the shocks. Unfortunately, the implied restrictions do not suffice for a full identification of the shocks in some of these models. Hence, additional restrictions have to be formu- lated which are often ad hoc and do not have a convincing theoretical foun- dation. Even if theoretical considerations suffice to identify the monetary policy shocks, there may be no over-identifying information which could be...
View Full Document

Page1 / 26

Identifying Monetary Policy Shocks via Changes in Volatility

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online