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Identifying Monetary Policy Shocks via Changes in Volatility
Author(s) -
LANNE MARKKU,
LÜTKEPOHL HELMUT
Publication year - 2008
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2008.00151.x
Subject(s) - monetary policy , economics , volatility (finance) , autoregressive model , structural vector autoregression , monetary economics , identification (biology) , econometrics , vector autoregression , macroeconomics , botany , biology
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 can 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.