Identification of Monetary Policy Shocks with External Instrument SVAR

34 Pages Posted: 5 Dec 2017

See all articles by Kyungmin Kim

Kyungmin Kim

Board of Governors of the Federal Reserve System

Date Written: 2017-11-28

Abstract

We explore the use of external instrument SVAR to identify monetary policy shocks. We identify a forward guidance shock as the monetary shock component having zero instant impact on the policy rate. A contractionary forward guidance shock raises both future output and price level, stressing the relative importance of revealing policymakers' view on future output and price level over committing to a policy stance. We also decompose non-monetary structural shocks, and find that positive shocks to output and price level lead to monetary contraction. Since information on output and price level is revealed through both monetary and non-monetary channels, some monetary and non-monetary shocks can look alike, leading to linear dependence and violating usual instrument SVAR assumptions. We show that some of the main findings are robust to such dependence.

Keywords: Forward guidance, Instrument VAR, Monetary policy

JEL Classification: E52, E44

Suggested Citation

Kim, Kyungmin, Identification of Monetary Policy Shocks with External Instrument SVAR (2017-11-28). FEDS Working Paper No. 2017-113. Available at SSRN: https://ssrn.com/abstract=3080856 or http://dx.doi.org/10.17016/FEDS.2017.113

Kyungmin Kim (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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