Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited

We develop flexible semiparametric time series methods for the estimation of the causal effect of monetary policy on macroeconomic aggregates. Our estimator captures the average causal response to discrete policy interventions in a macrodynamic setting, without the need for assumptions about the process generating macroeconomic outcomes. The proposed estimation strategy, based on propensity score weighting, easily accommodates asymmetric and nonlinear responses. Using this estimator, we show that monetary tightening has clear effects on the yield curve and on economic activity. Monetary accommodation, however, appears to generate less pronounced responses from both. Estimates for recent financial crisis years display a similarly dampened response to monetary accommodation.