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Revisiting the effects of monetary policy shocks: Evidence from SVAR with narrative sign restrictions

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  • Cheng, Kai
  • Yang, Yang

Abstract

This article analyzes the effects of monetary policy shocks using a structural vector autoregression (SVAR) model that is identified using a combination of narrative sign restrictions and sign restrictions on the systematic component of monetary policy. We find that contractionary monetary policy shocks induce real GDP to drop with very high posterior probability when narrative sign restrictions are included. The posterior probability intervals of the structural parameters in the monetary policy equation based on our restrictions are smaller than those constructed by Arias et al. (2019), excluding some implausible large values. Subsample analysis shows that the “price puzzle” disappeared during the Great Moderation.

Suggested Citation

  • Cheng, Kai & Yang, Yang, 2020. "Revisiting the effects of monetary policy shocks: Evidence from SVAR with narrative sign restrictions," Economics Letters, Elsevier, vol. 196(C).
    • Handle: RePEc:eee:ecolet:v:196:y:2020:i:c:s0165176520303591
    DOI: 10.1016/j.econlet.2020.109598
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    4. Ramey, V.A., 2016. "Macroeconomic Shocks and Their Propagation," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 71-162, Elsevier.
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    10. Jon Faust, 1998. "The robustness of identified VAR conclusions about money," International Finance Discussion Papers 610, Board of Governors of the Federal Reserve System (U.S.).
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    12. Jonas E. Arias & Juan F. Rubio‐Ramírez & Daniel F. Waggoner, 2018. "Inference Based on Structural Vector Autoregressions Identified With Sign and Zero Restrictions: Theory and Applications," Econometrica, Econometric Society, vol. 86(2), pages 685-720, March.
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    15. Arias, Jonas E. & Caldara, Dario & Rubio-Ramírez, Juan F., 2019. "The systematic component of monetary policy in SVARs: An agnostic identification procedure," Journal of Monetary Economics, Elsevier, vol. 101(C), pages 1-13.
    16. Baumeister, Christiane & Hamilton, James, 2018. "Inference in Structural Vector Autoregressions When the Identifying Assumptions are Not Fully Believed: Re-evaluating the Role," CEPR Discussion Papers 12911, C.E.P.R. Discussion Papers.
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    Cited by:

    1. Raffaella Giacomini & Toru Kitagawa & Matthew Read, 2021. "Identification and Inference Under Narrative Restrictions," Papers 2102.06456, arXiv.org.
    2. Chevaughn van der Westhuizen & Renee van Eyden & Goodness C. Aye, 2023. "Monetary Policy Effectiveness in the Face of Uncertainty: The Real Macroeconomic Impact of a Monetary Policy Shock in South Africa during High and Low Uncertainty States," Working Papers 202331, University of Pretoria, Department of Economics.

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    More about this item

    Keywords

    SVAR; Monetary policy shocks; Narrative sign restrictions; Systematic component of monetary policy;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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