Measuring Monetary Policy Reaction Function for Jamaica: A Narrative-Based VAR Analysis

Abstract:     
In this paper we construct a new monetary policy indicator (MPI) for Jamaica. Further to the construction of this indicator, two variants of augmented VAR are estimated. These are the structural VAR and a variant of the fusion between VAR and the analytical narrative-approach (ANA); forming the ANA-VAR Hybrids, as proposed by Leeper (1997). The monetary policy structural VAR returns price and exchange rate puzzles, which disappears when MPI is modeled as an endogenous variable. We find that innovation to real money stock explains a relatively large proportion of total real income in the first 2 years, while innovation to real income explains a small proportion of real money balance. The former finding is consistent with the VAR literature while the later is inconsistent with monetary convention. Furthermore, We find that a monetary expansion depreciates the Jamaican dollar, which in turn impacts negatively on imports in the first 3 quarters of policy implementation. On average monetary stabilization policies contributed to economic stagnation in Jamaica over the review period.

Number of Pages in PDF File: 24

Keywords: Monetary Stabilization Policy Shocks, Analytical Narrative Approach, VAR, Jamaica

JEL Classification: E52, E58

working papers series