Identification of Forward Guidance Shocks with External Instrument SVAR
32 Pages Posted: 20 Sep 2017
Date Written: September 8, 2017
We identify forward guidance shocks using external instrument structural vector autoregression (SVAR). Contractionary forward guidance shocks raise both future output and price level, and this suggests that monetary policy announcements affect the expected future rate path mainly by revealing policymakers' view on future output and price level, rather than by revealing future policy stance. We also decompose non-monetary structural shocks, and find that positive shocks to output and price level have contractionary impacts on monetary policy. With monetary policy announcements revealing information on output and price level, monetary and non-monetary shocks can share a common element, violating usual instrument SVAR assumptions. We show that our results are robust to the existence of such a common element.
Keywords: Vector autoregression, monetary policy, forward guidance
JEL Classification: E52, E44
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