Systematic monetary policy in a SVAR for Australia

• Published in: Economic modelling 2023-11, Vol.128, p.106519, Article 106519
• Main Authors: Fisher, Lance A., Huh, Hyeon-seung
• Format: Article
• Language: English
• Subjects: Coefficient sign restrictions; Monetary policy shocks; Puzzles; Structural equations
• ISSN: 0264-9993
• DOI: 10.1016/j.econmod.2023.106519

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. •The coefficients in a structural interest rate equation are sign restricted.•A new sign restriction algorithm is extended to account for estimation uncertainty.•Some accepted responses to a contractionary monetary policy shock display a puzzle.•The Max and Min Target responses show no price, output or unemployment rate puzzle.•They jointly imply plausible ranges for the coefficients in the interest rate rule.