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Systematic monetary policy in a SVAR for Australia

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  • Fisher, Lance A.
  • Huh, Hyeon-seung

Abstract

Sign restrictions on the coefficients in the structural equation for the policy interest rate and a normalization requirement identify this equation as the monetary policy equation and its shock as the monetary policy shock in a partial SVAR for conventional monetary policy in Australia. We use a recently developed sign restrictions algorithm and extend it to account for estimation uncertainty in the reduced-form VAR. Many of the accepted responses display puzzles. The maximum and minimum target responses are obtained as each corresponds to a single monetary policy equation. Both show that prices and output fall, and the unemployment rate rises, following a contractionary monetary policy shock. The minimum target response shows a slight exchange rate puzzle. These results are compared to those from a traditional sign restrictions algorithm and with other studies. The target responses imply plausible ranges for the coefficients in the monetary policy equation.

Suggested Citation

  • Fisher, Lance A. & Huh, Hyeon-seung, 2023. "Systematic monetary policy in a SVAR for Australia," Economic Modelling, Elsevier, vol. 128(C).
    • Handle: RePEc:eee:ecmode:v:128:y:2023:i:c:s0264999323003310
    DOI: 10.1016/j.econmod.2023.106519
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    Cited by:

    1. Nicolas Groshenny & Naveed Javed, 2023. "Dornbusch’s overshooting and the systematic component of monetary policy in SOE-SVARs," TEPP Working Paper 2023-08, TEPP.

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    More about this item

    Keywords

    Monetary policy shocks; Structural equations; Coefficient sign restrictions; Puzzles;
    All these keywords.

    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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