(Almost) Recursive Identification of Monetary Policy Shocks with Economic Parameter Restrictions

31 Pages Posted: 26 Jan 2023

See all articles by Jan Pablo Burgard

Jan Pablo Burgard

University of Trier - Faculty of Economics

Matthias Neuenkirch

University of Trier - Faculty of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Dennis Umlandt

University of Innsbruck - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: 2023

Abstract

Recursively identified vector autoregressive (VAR) models often lead to a counterintuitive response of prices (and output) shortly after a monetary policy shock. To overcome this problem, we propose to estimate the VAR parameters under the restriction that economic theory is not violated, while the shocks are still recursively identified. We solve this optimization problem under non-linear constraints using an augmented Lagrange solution approach, which adjusts the VAR coefficients to meet the theoretical requirements. In a generalization, we allow for a (minimal) rotation of the Cholesky matrix in addition to the parameter restrictions. Based on a Monte Carlo study and an empirical application, we show that particularly the “almost recursively identified approach with parameter restrictions” leads to a solution that avoids an estimation bias, generates theory-consistent impulse responses, and is as close as possible to the recursive scheme.

Keywords: monetary policy transmission, non-linear optimization, price puzzle, recursive identification, rotation, sign restrictions

JEL Classification: C320, E520, E580

Suggested Citation

Burgard, Jan Pablo and Neuenkirch, Matthias and Umlandt, Dennis, (Almost) Recursive Identification of Monetary Policy Shocks with Economic Parameter Restrictions (2023). CESifo Working Paper No. 10219, Available at SSRN: https://ssrn.com/abstract=4338236 or http://dx.doi.org/10.2139/ssrn.4338236

Jan Pablo Burgard

University of Trier - Faculty of Economics ( email )

Germany

Matthias Neuenkirch (Contact Author)

University of Trier - Faculty of Economics ( email )

Universitätsring 15
Trier, 54296
Germany
+49 - (0)651 - 201 - 2629 (Phone)

HOME PAGE: http://www.uni-trier.de/index.php?id=50130

CESifo (Center for Economic Studies and Ifo Institute) ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Dennis Umlandt

University of Innsbruck - Department of Banking and Finance ( email )

Innsbruck
Austria

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