Identifying VARs Based on High Frequency Futures Data
Board of Governors of the Federal Reserve - Division of International Finance; Johns Hopkins University
Eric T. Swanson
Federal Reserve Bank of San Francisco
Jonathan H. Wright
Board of Governors of the Federal Reserve System - Trade and Financial Studies Section
FRB International Finance Discussion Paper No. 720
Using the prices of federal funds futures contracts, we measure the impact of the surprise component of Federal Reserve policy decisions on the expected future trajectory of interest rates. We show how this information can be used to identify the effects of a monetary policy shock in a standard monetary policy VAR. This constitutes an alternative approach to identification that is quite different, and, we would argue, more plausible, than the conventional short-run restrictions. We find that the usual recursive identification of the model is rejected, but we nevertheless agree with the literature's conclusion that only a small fraction of the variance of output can be attributed to monetary policy shocks.
Number of Pages in PDF File: 44
Keywords: partial identification, monetary policy, vector autoregressions
JEL Classification: C32, E50working papers series
Date posted: April 27, 2002
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