Monetary Policy, External Instruments and Heteroskedasticity

35 Pages Posted: 8 Aug 2018

See all articles by Maximilian Podstawski

Maximilian Podstawski

DIW Berlin

Thore Schlaak

German Institute for Economic Research (DIW Berlin)

Malte Rieth

German Institute for Economic Research (DIW Berlin)

Date Written: July 2018

Abstract

We develop a vector autoregressive framework for combining the information in an external instrument with the information in the second moments of the data to identify latent monetary shocks in the United States. We show that the framework improves the identification of the structural model and allows testing the validity of instruments proposed in the literature. Using a valid instrument, we then document that surprise monetary contractions lead to a medium-sized significant decline in economic activity, that the contractionary effect is also present during the great moderation, and that the role of monetary shocks in driving real and financial fluctuations is small in low and big in high volatility regimes.

Keywords: Monetary policy, structural vector autoregressions, identification with external instruments, heteroskedasticity, Markov switching

JEL Classification: E52,C32,E58,E32

Suggested Citation

Podstawski, Maximilian and Schlaak, Thore and Rieth, Malte, Monetary Policy, External Instruments and Heteroskedasticity (July 2018). DIW Berlin Discussion Paper No. 1749. Available at SSRN: https://ssrn.com/abstract=3227780

Maximilian Podstawski

DIW Berlin ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Thore Schlaak (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Malte Rieth

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

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