Identifying Monetary Policy in Macro-Finance Models

36 Pages Posted: 24 Aug 2013

See all articles by David K. Backus

David K. Backus

NYU Stern School of Business; National Bureau of Economic Research (NBER)

Mikhail Chernov

UCLA Anderson

Stanley E. Zin

New York University (NYU); National Bureau of Economic Research (NBER)

Irina Zviadadze

Stockholm School of Economics; Swedish House of Finance; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: August 2013

Abstract

Identification problems arise in New Keynesian and macro-finance models when the Taylor rule includes both responses to observable variables like inflation and output, and a shock unseen by economists. Identification of the rule's parameters requires additional restrictions on this unobserved shock. We demonstrate how this can be accomplished in a macro term structure model using only long-run neutrality restrictions consistent with a wide variety of theories. The resulting Taylor rule is comparable to those commonly found in the literature. The unobserved shock is closely related to the slope factor of empirical term structure models.

Suggested Citation

Backus, David K. and Chernov, Mikhail and Zin, Stanley E. and Zviadadze, Irina, Identifying Monetary Policy in Macro-Finance Models (August 2013). NBER Working Paper No. w19360. Available at SSRN: https://ssrn.com/abstract=2315444

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Mikhail Chernov

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Stanley E. Zin

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Irina Zviadadze

Stockholm School of Economics ( email )

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Centre for Economic Policy Research (CEPR) ( email )

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