Identifying Monetary Policy Shocks Via Changes in Volatility

26 Pages Posted: 14 Jul 2006

See all articles by Markku Lanne

Markku Lanne

University of Helsinki - Faculty of Social Sciences

Helmut Luetkepohl

European University Institute; CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 2006

Abstract

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 which would make statistical tests of different theories possible. It is pointed out that some progress towards overidentifying 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 US data from 1965-1996 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.

Keywords: monetary policy, structural vector autoregressive analysis, vector autoregressive

JEL Classification: C32

Suggested Citation

Lanne, Markku and Luetkepohl, Helmut, Identifying Monetary Policy Shocks Via Changes in Volatility (June 2006). CESifo Working Paper Series No. 1744, Available at SSRN: https://ssrn.com/abstract=917066

Markku Lanne

University of Helsinki - Faculty of Social Sciences ( email )

P.O. Box 17 (Arkadiankatu 7)
Helsinki, 00014
Finland
+358 2941 28731 (Phone)

HOME PAGE: http://https://blogs.helsinki.fi/lanne/

Helmut Luetkepohl (Contact Author)

European University Institute ( email )

Villa San Paulo
Via della Piazzola 43
I-50133 Firenze
Italy
+39 055 4685 971 (Phone)
+39 055 4685 902 (Fax)

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
111
Abstract Views
757
rank
303,431
PlumX Metrics