Gaussian Mixture Approximations of Impulse Responses and the Non-Linear Effects of Monetary Shocks

65 Pages Posted: 11 Jul 2016

See all articles by Regis Barnichon

Regis Barnichon

Federal Reserve Bank of San Francisco

Christian Matthes

Federal Reserve Bank of Richmond

Date Written: July 2016

Abstract

This paper proposes a new method to estimate the (possibly non-linear) dynamic effects of structural shocks by using Gaussian basis functions to parametrize impulse response functions. We apply our approach to the study of monetary policy and obtain two main results. First, regardless of whether we identify monetary shocks from (i) a timing restriction, (ii) sign restrictions, or (iii) a narrative approach, the effects of monetary policy are highly asymmetric: A contractionary shock has a strong adverse effect on unemployment, but an expansionary shock has little effect. Second, an expansionary shock may have some expansionary effect, but only when the labor market has some slack. In a tight labor market, an expansionary shock generates a burst of inflation and no significant change in unemployment.

Suggested Citation

Barnichon, Regis and Matthes, Christian, Gaussian Mixture Approximations of Impulse Responses and the Non-Linear Effects of Monetary Shocks (July 2016). CEPR Discussion Paper No. DP11374. Available at SSRN: https://ssrn.com/abstract=2807785

Regis Barnichon (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States

Christian Matthes

Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

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