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Identification of Monetary Policy Shocks with External Instrument SVAR

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Abstract

We explore the use of external instrument SVAR to identify monetary policy shocks. We identify a forward guidance shock as the monetary shock component having zero instant impact on the policy rate. A contractionary forward guidance shock raises both future output and price level, stressing the relative importance of revealing policymakers' view on future output and price level over committing to a policy stance. We also decompose non-monetary structural shocks, and find that positive shocks to output and price level lead to monetary contraction. Since information on output and price level is revealed through both monetary and non-monetary channels, some monetary and non-monetary shocks can look alike, leading to linear dependence and violating usual instrument SVAR assumptions. We show that some of the main findings are robust to such dependence.

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  • Kyungmin Kim, 2017. "Identification of Monetary Policy Shocks with External Instrument SVAR," Finance and Economics Discussion Series 2017-113, Board of Governors of the Federal Reserve System (U.S.).
    • Handle: RePEc:fip:fedgfe:2017-113
    DOI: 10.17016/FEDS.2017.113
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    Cited by:

    1. Zhengyang Chen, 2019. "The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission," 2019 Papers pch1858, Job Market Papers.
    2. Ma, Liang, 2024. "Using stock prices to help identify unconventional monetary policy shocks for external instrument SVAR," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1234-1247.

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    More about this item

    Keywords

    Forward guidance; Instrument VAR; Monetary policy;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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