The Systematic Component of Monetary Policy in SVARs: An Agnostic Identification Procedure

Jonas E. Arias, Dario Caldara, and Juan F. Rubio-Ramírez

Working Paper 2016-15a
Revised October 2017

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This paper studies the effects of monetary policy shocks using structural VARs. We achieve identification by imposing sign and zero restrictions on the systematic component of monetary policy. Importantly, our identification scheme does not restrict the contemporaneous response of output to a monetary policy shock. Using data for the period 1965–2007, we consistently find that an increase in the federal funds rate induces a contraction in output. We also find that monetary policy shocks are contractionary during the Great Moderation. Finally, we show that the identification strategy in Uhlig (2005), which imposes sign restrictions on the impulse response functions to a monetary policy shock, does not satisfy our restrictions on the systematic component of monetary policy with high posterior probability.

JEL classification: E52, C51

Key words: SVARs, monetary policy shocks, systematic component of monetary policy

The authors thank conference and seminar participants at the 2014 Paris Workshop on Empirical Monetary Economics, Board of Governors of the Federal Reserve System, Federal Reserve Bank of Atlanta, Federal Reserve Bank of New York, Federal Reserve Bank of Philadelphia, Institute for Economic Analysis at the Universitat Autonoma de Barcelona, IMF, Macro Midwest Meeting Fall 2014, North Carolina State University, System Conference in Macroeconomics Fall 2014, and the University of Pennsylvania for comments and discussions, especially Toni Braun, Frank Diebold, Pablo Guerron-Quintana, Matteo Iacoviello, Jesper Linde, John Roberts, Frank Schorfheide, Enrique Sentana, Pedro Silos, Paolo Surico, Mathias Trabandt, Harald Uhlig, Rob Vigfusson, Daniel Waggoner, and Tao Zha. They also thank Mazi Kazemi for valuable research assistance. Juan F. Rubio-Ramírez acknowledges financial support from the National Science Foundation, Foundation Banque de France pour la Recherche, the Institute for Economic Analysis (IAE), the "Programa de Excelencia en Educacion e Investigacion" of the Bank of Spain, and the Spanish ministry of science and technology Ref. ECO2011-30323-c03-01, Duke University, BBVA Research, and the Federal Reserve Bank of Atlanta. The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Philadelphia or the Board of Governors of the Federal Reserve System. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Jonas Arias, Federal Reserve Bank of Philadelphia, Research Department, Ten Independence Mall, Philadelphia, PA 19106-1574,; Dario Caldara, Federal Reserve Board of Governors, Trade and Financial Studies Section, 20th Street and Constitution Avenue NW, Washington, DC 20551,; or Juan Rubio-Ramírez, Emory University, Federal Reserve Bank of Atlanta, BBVA Research, and Fulcrum Asset Management, Economics Department, Rich Memorial Building, Room 306, Atlanta, GA 30322-2240
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