Time Varying Structural Vector Autoregressions and Monetary Policy

46 Pages Posted: 8 Jan 2003

See all articles by Giorgio E. Primiceri

Giorgio E. Primiceri

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Date Written: December 2002

Abstract

Monetary policy and the private sector behavior of the US economy are modeled as a time varying structural vector autoregression, where the sources of time variation are both the coefficients and the variance covariance matrix of the innovations. The paper develops a new, simple modeling strategy for the law of motion of the variance covariance matrix and proposes an efficient Markov chain Monte Carlo algorithm for the model likelihood/posterior numerical evaluation. The main empirical conclusions are: 1) both systematic and non-systematic monetary policy have changed during the last forty years. In particular, long run systematic responses of the interest rate to inflation and unemployment exhibit a trend toward a more aggressive behavior, despite remarkable oscillations; 2) this has had a negligible effect on the rest of the economy. The role played by exogenous non-policy shocks seems much more important than monetary policy in explaining the high inflation and unemployment episodes in recent US economic history.

Keywords: Time varying coefficients, multivariate stochastic volatility, Gibbs sampling, Taylor rule, monetary policy shocks, identification

JEL Classification: C15, C22, E31, E32, E58

Suggested Citation

Primiceri, Giorgio E., Time Varying Structural Vector Autoregressions and Monetary Policy (December 2002). Available at SSRN: https://ssrn.com/abstract=352960 or http://dx.doi.org/10.2139/ssrn.352960

Giorgio E. Primiceri (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

HOME PAGE: http://faculty.econ.northwestern.edu/faculty/primiceri

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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