Identifying Monetary Policy Shocks via Changes in Volatility

A central issue of monetary policy analysis is the specification of monetary policy shocks. In a structural vector autoregressive setting there has been some controversy about which restrictions to use for identifying the shocks because standard theories do not provide enough information to fully id...

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Bibliographic Details
Published in:Journal of money, credit and banking credit and banking, 2008-09, Vol.40 (6), p.1131-1149
Main Authors: LANNE, MARKKU, LÜTKEPOHL, HELMUT
Format: Article
Language:English
Subjects:
Analysis
Autoregression (Statistics)
Bank credit
C32
Cephalopelvic disproportion
Covariance matrices
Credit
Demand shocks
Economic models
Economic shock
Economic theory
Estimators
Federal funds rate
Impulse response functions
impulse responses
Macroeconomics
Monetary economics
Monetary policy
P values
Regression analysis
Shock tests
structural vector autoregressive analysis
Studies
Transmission mechanism
vector autoregressive process
Vector-autoregressive models
Volatility
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Summary:A central issue of monetary policy analysis is the specification of monetary policy shocks. In a structural vector autoregressive setting there has been some controversy about which restrictions to use for identifying the shocks because standard theories do not provide enough information to fully identify monetary policy shocks. In fact, to compare different theories it would even be desirable to have over-identifying restrictions that would make statistical tests of different theories possible. It is pointed out that some progress toward over-identifying monetary policy shocks caṅ be made by using specific data properties. In particular, it is shown that changes in the volatility of the shocks can be used for identification. Based on monthly U.S. data from 1965 to 1996 different theories are tested and it is found that associating monetary policy shocks with shocks to nonborrowed reserves leads to a particularly strong rejection of the model whereas assuming that the Fed accommodates demand shocks to total reserves cannot be rejected.
ISSN:0022-2879
1538-4616
DOI:10.1111/j.1538-4616.2008.00151.x