Uncertainty-Dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation

57 Pages Posted: 5 Mar 2018

See all articles by Efrem Castelnuovo

Efrem Castelnuovo

University of Melbourne - Department of Economics

Giovanni Pellegrino

University of Melbourne - Melbourne Institute of Applied Economic and Social Research

Multiple version iconThere are 2 versions of this paper

Date Written: March 4, 2018

Abstract

We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs. low macroeconomic uncertainty. We find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE models ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring firm-specific capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data.

Keywords: Monetary policy shocks, uncertainty, Threshold VAR, medium scale DSGE framework, minimum-distance estimation

JEL Classification: C22, E32, E52

Suggested Citation

Castelnuovo, Efrem and Pellegrino, Giovanni, Uncertainty-Dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation (March 4, 2018). Melbourne Institute Working Paper No. 02/18. Available at SSRN: https://ssrn.com/abstract=3134156 or http://dx.doi.org/10.2139/ssrn.3134156

Efrem Castelnuovo (Contact Author)

University of Melbourne - Department of Economics ( email )

Melbourne, 3010
Australia

HOME PAGE: http://https://sites.google.com/site/efremcastelnuovo/home

Giovanni Pellegrino

University of Melbourne - Melbourne Institute of Applied Economic and Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

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