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Estimating Causal Effects of Monetary Policy for a Small Open Economy: Econometric Model and Estimation Framework

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  • Markus Brueckner

Abstract

This paper provides an econometric model and estimation framework that enables to obtain estimates of causal effects of monetary policy in a small open economy. The model and estimation framework explicitly takes into account the endogeneity of monetary policy: i.e. if the central bank has an target inflation, then monetary policy itself is a function of economic shocks that affect inflation and other macroeconomic outcomes of interest. This is the standard simultaneity problem, which to date has not been satisfactorily addressed in the empirical monetary policy literature. The simultaneity problem can only be addressed if one has a valid instrument for monetary policy. In this paper I provide a local projections instrumental variables framework that enables to provide causal estimates of the dynamic effects that monetary policy in a small open economy has on inflation, the output gap, credit growth, and the exchange rate in the presence of external shocks.

Suggested Citation

  • Markus Brueckner, 2022. "Estimating Causal Effects of Monetary Policy for a Small Open Economy: Econometric Model and Estimation Framework," ANU Working Papers in Economics and Econometrics 2022-689, Australian National University, College of Business and Economics, School of Economics.
    • Handle: RePEc:acb:cbeeco:2022-689
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    File URL: https://cbe.anu.edu.au/researchpapers/econ/wp689.pdf
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    References listed on IDEAS

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    1. Hausman, Jerry A & Newey, Whitney K & Taylor, William E, 1987. "Efficient Estimation and Identification of Simultaneous Equation Models with Covariance Restrictions," Econometrica, Econometric Society, vol. 55(4), pages 849-874, July.
    2. Mikkel Plagborg‐Møller & Christian K. Wolf, 2021. "Local Projections and VARs Estimate the Same Impulse Responses," Econometrica, Econometric Society, vol. 89(2), pages 955-980, March.
    3. José Luis Montiel Olea & Mikkel Plagborg‐Møller, 2021. "Local Projection Inference Is Simpler and More Robust Than You Think," Econometrica, Econometric Society, vol. 89(4), pages 1789-1823, July.
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    More about this item

    JEL classification:

    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook

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