macroeconomic shocks structural change and real exchange rates evidence from historical data we present empirical evidence on the forces driving real exchange rates in the long run using data from the us uk and italy across different exchange rate regimes we find support for the hypothesis that productivity and fiscal shocks matter however in some cases fiscal shocks cause depreciations likely triggered by the monetary accommodation of fiscal shocks we also find that the traditional harrod balassa samuelson effect of productivity on real exchange rates is reversed in some cases which confirms the importance of the distributive sector in driving productivity gains

cross country variation in the liquidity effect the role of financial markets this paper examines cross country variation in the liquidity effect the negative response of interest rates to money supply shocks focusing on the role of financial factors in explaining this variation we estimate the liquidity effect for each of 21 countries using var models in which money supply shocks are restricted to be neutral in the long run then regress the estimated liquidity effect on financial market variables across countries we find that financial factors play an important role in determining the magnitude of the liquidity effect and that this evidence is most consistent with generalised versions of limited participation models

the differential regional effects of monetary policy this paper examines whether monetary policy has similar effects across regions in the united states impulse response functions from an estimated structural vector autoregression reveal a core of regions new england mideast plains southeast and the far west that respond to monetary policy changes in ways that closely approximate the u s average response of the three noncore regions one great lakes is noticeably more sensitive to monetary policy changes and two southwest and rocky mountains are found to be much less sensitive a state level version of the model is estimated and used to provide evidence on the channels for monetary policy

seigniorage and conventional taxation with multiple exogenous shocks abstract the correlation between seigniorage and conventional taxation is investigated in a dynamic optimizing model which contains three shocks to government expenditure and to the deadweight losses associated with conventional taxation and seigniorage asymmetric costs of adjusting revenue and potential absence of the availability of debt solutions and impulse response functions from the theoretical model are used to construct a three variable structural vector autoregression var and identify the empirical reduced form var judged by the parameter estimates empirical impulse response functions forecast error variance decompositions and historical decompositions of the time series identification is successful and the econometric results are supportive of the theoretical model

strategic restraint in contests abstract economic policy is modelled as the outcome of a political game between two interest groups the possible ex post realized outcomes in the game correspond to the proposed policies in the literature policy proposals are exogenous we extend such games by allowing the endogenous determination of the proposed policies in a first stage the groups decide which policy to lobby for and then in a second stage engage in a contest over the proposed policies our main result is that competition over endogenously determined policies induces strategic restraint that reduces polarization and in turn wasteful lobbying activities

a cointegrated structural var model of the canadian economy this paper implements a cointegrated structural var model of the canadian economy using quarterly data over the period 1964 1994 the dynamic properties of the estimated model are compared to the predictions of a simple textbook macro model four long run equilibrium relationships are tested i consumption income ii consumption wealth iii money demand and iv the fisher equation the empirical results obtained are generally consistent with the predictions of the textbook model s long run implications although level shifts are observed in the consumption income and the wealth income ratios similarly it is found that there was an increase in the ex post real interest rate implying a level shift in the fisher relation following the bank of canada s policy change towards a stable price level target

when do long run identifying restrictions give reliable results many recent articles have identified behavioral disturbances in vector autoregressions by imposing restrictions on the long run effects of shocks this article demonstrates that this approach will be unreliable unless the underlying economy satisfies three types of strong restrictions although many aspects of these issues have been raised before this article draws out and illustrates the implications for inferences under the long run scheme furthermore it provides strategies for dealing with the problems

measuring the economic impact of monetary union the case of okinawa data from okinawa s monetary union with the united states in 1958 and with japan in 1972 are used to obtain a quantitative indication of how monetary union might affect the behavior of nominal and real shocks across two economies with monetary union the variance of the real exchange rate between two economies declines and their business cycle linkage becomes stronger a var analysis of output and price data for okinawa and japan further indicates that the contribution of asymmetric nominal shocks in business cycles becomes smaller monetary union thus seems to facilitate both nominal and real convergence

sources of fluctuations in hours worked for canada germany japan and the u s a sign restriction var approach abstractthis study empirically examines the sources of fluctuations in hours worked in canada germany japan and the u s it is particularly motivated by gali s 1999 var study which demonstrates that a positive technology shock reduces hours worked at least in the short run however in the present study a technology shock is identified without recourse to gali s long run restriction which has been subject to active controversy furthermore this study uncovers other important sources of fluctuations in hours worked to reflect the concern raised by numerous studies that technology shocks leave most variations in hours worked unexplained specifically there are six shocks underlying our model and they are identified using a set of sign restrictions the empirical results confirm that in all four countries a positive technology shock significantly reduces hours worked this technology shock along with labor supply and demand shocks accounts for most of the short term variations in hours worked

using the aggregate demand aggregate supply model to identify structural demand side and supply side shocks results using a bivariate var this paper uses the short run restrictions implied by a simple aggregate demand aggregate supply model as an aid in identifying structural shocks combined with the blanchard quah restriction it allows estimation of the slope of the aggregate supply curve the variances of structural demand and supply shocks and the extent to which structural demand and supply shocks are correlated this paper finds that demand and supply shocks are highly correlated and that demand shocks possibly can account for as much as 82 of the long run forecast error variance of real u s gdp

causes of capital flows in developing countries abstract this paper investigates the causes of capital flows in four developing countries mexico chile korea and malaysia using structural decomposition analysis it finds that the recent resurgence in capital movements is largely due to external reasons such as decreases in the world interest rate or recession in industrial countries domestic factors including country specific productivity shocks and demand shocks are relatively less important another interesting finding is that the fundamental causes of capital flows differ little across the countries under study these results suggest that developing countries need to pay attention to the financial arrangements associated with capital flows and to exchange rate policy as well as macroeconomic fundamentals to avoid financial crises in a world of increased capital mobility

testing the multilateral version of purchasing power parity an application to burma and jordan under the sdr peg 1981 5 this paper derives the multilateral version of the classical purchasing power parity ppp hypothesis as it applies to the determination of the price level in a small open economy under a basket peg arrangement this is tested under the assumption of constant market clearing as well as that of slow price adjustment in the non traded good sector the result based on burma and jordan the currencies of which were pegged to the special drawing right sdr during 1981 5 supports the validity of the hypothesis namely that the price level in such an economy is determined by the currency share weighted average of the price levels in those countries whose currencies are included in the chosen basket

fiscal shocks and real exchange rate dynamics some evidence for latin america this paper analyses the effects of fiscal shocks using a two country macroeconomic model for output labour input government spending and relative prices which provides the orthogonality restrictions for obtaining the structural shocks dynamic simulation techniques are then applied in particular to shed light on the possible effects of fiscal imbalances on the real exchange rate in the case of six latin american countries using quarterly data over the period 1980 2006 we find that in a majority of cases fiscal shocks are the main driving force of real exchange rate fluctuations

tfp news and sentiments the international transmission of business cycles we propose a novel identification scheme for a non technology business cycle shock that we label sentiment this is a shock orthogonal to identified surprise and news tfp shocks that maximizes the short run forecast error variance of an expectational variable alternatively a gdp forecast or a consumer confidence index we then estimate the international transmission of three identified shocks surprise tfp news of future tfp and sentiment from the us to canada the us sentiment shock produces a business cycle in the us with output hours and consumption rising following a positive shock and accounts for the bulk of short run business cycle fluctuations in the us the sentiment shock also has a significant impact on canadian macro aggregates in the short run it is more important than either the surprise or the news tfp shocks in generating business cycle comovement between the us and canada accounting for up to 50 of the forecast error variance of canadian gdp and about one third of canadian hours imports and exports the news shock is responsible for some comovement at 5 10 years and surprise tfp innovations do not generate synchronization

a flexible finite horizon alternative to long run restrictions with an application to technology shocks abstract recent studies using long run restrictions question the validity of the technology driven real business cycle hypothesis we propose an alternative identification that maximizes the contribution of technology shocks to the forecast error variance of labor productivity at a long but finite horizon in small sample monte carlo experiments our identification outperforms standard long run restrictions by significantly reducing the bias in the short run impulse responses and raising their estimation precision unlike its long run restriction counterpart when our max share identification technique is applied to u s data it delivers the robust result that hours worked responds negatively to positive technology shocks

the effects of oil price shocks on the iranian economy abstract the iranian economy is highly vulnerable to oil price fluctuations this paper analyzes the dynamic relationship between oil price shocks and major macroeconomic variables in iran by applying a var approach the study points out the asymmetric effects of oil price shocks for instance positive as well as negative oil price shocks significantly increase inflation we find a strong positive relationship between positive oil price changes and industrial output growth unexpectedly we can only identify a marginal impact of oil price fluctuations on real government expenditures furthermore we observe the dutch disease syndrome through significant real effective exchange rate appreciation

stock prices news and economic fluctuations comment beaudry and portier 2006 propose an identification scheme to study the effects of news shocks about future productivity in vector error correction models vecms this comment shows that when applied to their vecms with more than two variables the identification scheme does not have a unique solution the problem arises from a particular interplay of cointegration assumptions and longrun restrictions jel e32 e44 g12 g14 in a highly influential paper beaudry and portier 2006 estimate vector error correction models vecms on us data and find that shocks generating a stock market boom but no contemporaneous movement in total factor productivity tfp henceforth called tfp news are closely related to shocks driving long run variations in tfp moreover these tfp news shocks lead to increases in consumption investment output and hours on impact and constitute an important source of business cycle fluctuations these results run counter to basic dynamic stochastic general equilibrium models and have sparked a new literature attempting to generate news driven positive comovement among macroeconomic aggregates 1 this comment shows that in the vecms with more than two variables estimated by beaudry and portier 2006 their identification scheme fails to determine tfp news yet these higher dimension systems are crucial to quantify the business cycle effects of tfp news 2 the identification problem arises from the interplay of two assumptions first the beaudry portier identification scheme called bp restrictions from here on requires that one of the nonnews shocks has no permanent impact on either tfp or consumption second the vecms estimated by beaudry and portier 2006 impose that tfp and consumption are cointegrated this cointegration means that tfp and consumption have the same permanent component which makes one

vector autoregressions and reduced form representations of dsge models abstract the performance of dynamic stochastic general equilibrium models is often tested against estimated vars this requires that the data generating process consistent with the dsge theoretical model has a finite order var representation this paper discusses the assumptions needed for a finite order var p representation of a dsge model to exist when a var p is only an approximation to the exact infinite order var the truncated var p may return largely incorrect estimates of the impulse response function the results do not hinge on small sample bias or on incorrect identification assumptions but the bias introduced by truncation can lead to bias in the identification of the structural shocks identification strategies that work in the exact var representation perform poorly in the truncated var

empirical evidence on the insulation properties of fixed and flexible exchange rates abstract this paper investigates whether japanese output stability since the mid 1970s is attributable to the change in exchange rate regime or to the changing nature of underlying disturbances we decompose foreign and domestic influences on output movements using restrictions on the long run dynamics to identify the disturbances we find that the flexible exchange rate regime is more effective in insulating the economy from foreign disturbances than is the fixed rate regime however in the case of japan it is primarily the changing nature of the fundamental disturbances to the economy that is responsible for greater output stability since the mid 1970s

sources of fluctuations in relative prices evidence from high inflation countries casual analysis of six high inflation episodes indicates a strong positive relationship between movements in the relative price ratio measured by wpi cpi and the inflation rate the authors estimate a vector autoregression model in which relative price movements are driven by several fundamental disturbances fiscal monetary output and exchange rate identified using only long run restrictions based on a general equilibrium optimizing model analysis of the endogenous response of relative price changes to these disturbances suggests that output and monetary shocks are the most important driving forces although fiscal and exchange rate shocks are also influential in explaining relative price movements in some countries copyright 1993 by mit press

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

investment specific news shocks and u s business cycles we provide robust evidence that news shocks about future investment specific technology ist constitute a significant force behind u s business cycles positive ist news shocks induce comovement that is raise output consumption investment and hours these shocks account for 70 of the business cycle variation in output hours and consumption and 60 of the variation in investment and have played an important role in 9 of the last 10 u s recessions our findings provide strong support for shifting focus to ist news shocks when investigating the role of news in driving u s business cycles

news shocks and the slope of the term structure of interest rates abstract we adopt a statistical approach to identify the shocks that explain most of the fluctuations of the slope of the term structure of interest rates we find that one shock can explain the majority of unpredictable movements in the slope impulse response functions lead us to interpret this shock as news about future total factor productivity tfp by showing that slope shocks are essentially tfp news shocks we provide a new explanation for the relationship between the slope and macroeconomic fundamentals our results also provide a new empirical benchmark for structural models at the intersection of macroeconomics and finance jel e23 e43 e52 g12 g14

productivity shocks and real exchange rates abstract previous studies have concluded that productivity shocks have negligible effects on real exchange rate fluctuations this paper shows that when long run equilibrium relationships between real exchange rate levels and fundamental variables are taken into account relative productivity shocks account for most of the long run movements in the real exchange rates this can be interpreted as empirical support for the balassa 1964 journal of political economy 72 584 596 and samuelson 1964 review of economics and statistics 46 145 154 model where differences in relative productivity is the main source of long run deviations for purchasing power parity

monetary policy analysis and inflation targeting in a small open economy a var approach empirical monetary policy research has increased in the last decade possibly because deregulation and explicit monetary targets have made monetary policy issues more interesting in particular within the inflation targeting framework it has been argued that inflation forecasts can be used as optimal intermediate targets for monetary policy and the development of empirical models that have good forecasting properties is therefore important this paper shows that a var model with long run restrictions justified by economic theory is useful for both forecasting inflation and for analysing other issues that are central to the conduct of monetary policy copyright 2001 john wiley sons ltd

business cycle measurement with some theory a method to evaluate cyclical models not requiring knowledge of the dgp and the exact specification of the aggregate decision rules is proposed we derive robust restrictions in a class of models use some to identify structural shocks in the data and others to evaluate the class or contrast sub models the approach has good properties even in small samples and when the class of models is misspecified the method is used to sort out the relevance of a certain friction the presence of rule of thumb consumers in a standard class of models

the effects of monetary policy shocks comparing contemporaneous versus long run identifying restrictions this study compares the effects of monetary policy shocks on the macroeconomy using four different procedures for identifying policy shocks that use contemporaneous restrictions and a procedure that uses long run restrictions impulse response functions are computed using the same vector autoregressive var model and sample period the comparison is done for a model that includes only a short term interest rate and for a model that adds a long term rate as well sources of differences in the magnitude of effects across identification schemes are examined vector autoregressive var models have been widely used in recent years to analyze the effects of monetary policy shocks however estimates of the macroeconomic effects of monetary policy often differ across studies with regard to both timing and magnitude the studies generating these estimates frequently differ in terms of the variables constituting the model the sample period for estimation and the method of identifying policy shocks see e g christiano eichenbaum and evans 1994 1996 1998 gordon and leeper 1994 lastrapes and selgin 1995 pagan and robertson 1995 1998 leeper sims and zha 1996 certainly a critical element in the estimation of the effects of policy shocks is the identification of these policy shocks that is the determination of exogenous shocks to monetary policy two methods have been widely used in the var literature to identify structural shocks to monetary policy one general approach employs restrictions on the contemporaneous relations among the variables of the var model while the second general approach imposes restrictions on the long run relations among the variables although economic and institutional arguments can be used to rationalize each identification scheme there is no consensus as to which approach to identifying shocks is preferred and the weaknesses of both approaches have been discussed in the literature keating 1992 lastrapes and selgin 1995 and mccarthy 1995 consider limitations of the use of contemporaneous identifying restrictions faust and leeper 1997 discuss potential drawbacks of imposing long run restrictions the aim of this study is to examine the implications of contemporaneous versus long run

business cycle convergence in emu a first look at the second moment we analyse the dynamics of the standard deviation of demand and supply shocks as well as of the demand component of gdp across countries in the european monetary union emu this analysis allows us to evaluate the patterns of cyclical comovement in emu and compare them the cyclical performance of the new members of the eu and other oecd countries we make use of sigma convergence methods to identify synchronization patterns in business cycles the eurozone has converged to a stable lower level of dispersion across business cycles during the end of the 80s and the beginning of the 90s the new eu members have also experienced a strong pattern of convergence from 1998 to 2005 when a strong divergence trend appears an enlargement of the emu to 22 members would not significantly decrease its optimality as a currency area there is evidence for some europe specific characteristics as compared to global comovements in business cycles authors abstract

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

durable goods and the forward looking theory of consumption estimates implied by the dynamic effects of money abstract in this paper we analyze the effects of money on the market for durable goods using quarterly us data we estimate the dynamic responses of the price and quantity of durable goods and housing to money supply shocks assuming only that money is neutral in the long run we then match these responses to those predicted by an equilibrium model of the markets for durable goods the model relies on the standard theory of intertemporal consumer choice and the trade off between durable and non durable goods we find that money has important dynamic effects on the markets for durable goods and that the theory provides a reasonable framework for interpreting these responses for plausible parameter values

monetary policy and long term interest rates in germany abstract in this paper we provide new empirical evidence on the relationship between short and long run interest rates for germany we find a positive correlation after a supply and demand shock and a negative correlation after a monetary policy shock this finding is consistent with the theory of ellingsen and soderstrom american economic review 2001 91 5 1594 1607

monetary policy shocks what have we learned and to what end this paper reviews recent research that grapples with the question what happens after an exogenous shock to monetary policy we argue that this question is interesting because it lies at the center of a particular approach to assessing the empirical plausibility of structural economic models that can be used to think about systematic changes in monetary policy institutions and rules the literature has not yet converged on a particular set of assumptions for identifying the effects of an exogenous shock to monetary policy nevertheless there is considerable agreement about the qualitative effects of a monetary policy shock in the sense that inference is robust across a large subset of the identification schemes that have been considered in the literature we document the nature of this agreement as it pertains to key economic aggregates

on the sources of business cycles in the g 7 abstract this paper examines sources of cyclical movements in output inflation and the term structure of interest rates in the g 7 it employs a novel identification approach which uses the sign of the theoretical cross correlation function in response to shocks to catalog orthogonal disturbances we find that demand shocks are the dominant source of output and inflation fluctuations in several of the g 7 countries the proportion of term structure variability explained by different structural sources does not depend on the horizon apart from the us and canada structural shocks are nearly uncorrelated across countries

historical decomposition of aggregate demand and supply shocks in a small macro model we estimate and analyze the impact of multiple aggregate demand and aggregate supply shocks in a small macroeconomic model of the economy the analysis serves two purposes first we assess the relative importance of the various shocks in explaining the path of output over the past three decades second we conduct counterfactual policy experiments which show the effects of alternative policies on key macro variables we find that using the monetary policy tool reserves or the base such that constant money growth occurs would have produced superior economic results fluctuations in macroeconomic activity are generally explained in terms of shocks to aggregate demand and supply many theoretical models suggest a role for both types of shocks demand shocks including but not limited to policy innovations are typically thought to have real effects in the short to medium run but not in the long run supply shocks including resource and technology shocks have effects in both the short and long runs most empirical studies find important effects of both aggregate demand and supply shocks although demand and supply shocks are important conceptually in applied work the nature of the identified shocks has differed some studies identify only one generic shock to aggregate

can long run restrictions identify technology shocks gali s innovative approach of imposing long run restrictions on a vector autoregression var to identify the effects of a technology shock has become widely utilized in this paper we investigate its reliability through monte carlo simulations using calibrated business cycle models overall gali s methodology appears to be fruitful the impulse responses derived from the artificial data generally have the same sign and qualitative pattern as the true responses and the approach can be informative in discriminating between alternative models however our results reveal some important quantitative shortcomings including considerable estimation uncertainty about the impact of technology shocks on macroeconomic variables more generally the conditions under which the methodology performs well appear considerably more restrictive than implied by the key identifying assumption this underscores the importance of using economic models to guide in the implementation of the approach in interpreting the results and in assessing its limitations jel c32 e32 o33

what caused the early millennium slowdown evidence based on vector autoregressions this paper uses a simple var for the usa and euro area to analyse the underlying shocks of the early millennium slowdown i e supply demand monetary policy and oil price shocks the results of two identification strategies are compared one is based on traditional zero restrictions and as an alternative an identification scheme based on more recent sign restrictions is proposed the main conclusion is that the recent slowdown is caused by a combination of several shocks negative aggregate supply and aggregate spending shocks the increase of oil prices in 1999 and restrictive monetary policy in 2000 these shocks are more pronounced in the usa than the euro area the results are somewhat different depending on the identification strategy it is illustrated that traditional zero restrictions can have an influence on the estimated impact of certain shocks copyright 2005 john wiley sons ltd

international business cycles the authors estimate a dynamic two country model in which economic fluctuations are driven by a worldwide supply shock country specific supply shocks and relative fiscal money and preference shocks identification is achieved using only long run restrictions based on a theoretical model the main results are 1 supply shocks particularly country specific ones are very important in generating international business cycles and 2 although the post 1973 flexible exchange rate period has been inherently more volatile there are no differences in transmission properties of economic disturbances across exchange rate regimes for the endogenous variables they focus on copyright 1993 by american economic association

an empirical analysis on capital flows the case of korea and mexico this paper discusses causes of capital flows in korea and mexico both countries received substantial amounts of foreign capital in the late 1980s and early 1990s international capital helped these countries achieve a higher standard of living and faster economic growth however undesirable macroeconomic effects such as appreciation of real exchange rate and widening current account deficits usually accompany foreign capital inflows the vector autoregressive var method is applied to investigate the underlying shocks causing the capital inflows the main findings are that the u s business cycle and shocks to foreign interest rates account for more than 50 of capital inflows to both countries in the past two decades

why u s money does not cause u s output but does cause hong kong output abstract standard econometric tests for whether money causes output will be meaningless if monetary policy is chosen optimally to smooth fluctuations in output if u s monetary policy were chosen to smooth u s output we show that u s money will not granger cause u s output indeed as shown by rowe and yetman 2002 identifying policy makers objectives an application to the bank of canada canadian journal of economics 35 2 239 256 if there is a say 6 quarter lag in the effect of money on output then u s output will be unforecastable from any information set available to the fed lagged 6 quarters but if other countries for example hong kong have currencies that are fixed to the u s dollar hong kong monetary policy will then be chosen in washington d c with no concern for smoothing hong kong output econometric causality tests of u s money on hong kong output will then show evidence of causality we test this empirically our empirical analysis also provides a measure of the degree to which macroeconomic stabilisation is sacrificed by adopting a fixed exchange rate rather than an independent monetary policy

the long run phillips curve a structural var investigation both cointegration methods and non cointegrated structural vars identified based on either long run restrictions or a combination of long run and sign restrictions are used in order to explore the long run trade off between inflation and the unemployment rate in the post wwii u s u k euro area canada and australia overall neither approach produces clear evidence of a non vertical trade off the extent of uncertainty surrounding the estimates is however substantial thus implying that a researcher holding alternative priors about what a reasonable slope of the long run trade off might be will likely not see her views falsified

is the exchange rate a shock absorber or a source of shocks new empirical evidence this paper analyses the role of the real exchange rate in a structural vector autoregression framework for the united kingdom euro area japan and canada vis a vis the united states a new identification strategy is proposed building on sign restrictions the results are compared to the benchmark conventional approach of clarida and gali 1994 based on longrun zero restrictions although the restrictions are derived from the same theoretical model the results are strikingly different in contrast to the benchmark model an important role for nominal shocks in explaining real exchange rate fluctuations is found hence the exchange rate can rather be considered as a source of shocks instead of a shock absorber

can monetary policy influence long term interest rates it depends i introduction a stated goal of u s monetary policy is to maintain full employment in the u s economy 1 to do so however means the federal reserve must be capable of stabilizing aggregate demand particularly the historically volatile category of investment spending as this form of spending is highly sensitive to long term interest rates one implication of the full employment goal for u s monetary policy is that the federal reserve should be able to influence long term interest rates an important question then is whether u s monetary policy actually has any meaningful influence over long term interest rates a number of studies in recent years have examined this question but have come to different conclusions some studies show monetary policy has a sizeable and statistically significant effect on long term interest rates whereas others show the opposite the uncertainty created by this lack of consensus makes it difficult for the federal reserve to determine its impact on long term interest rates it is our objective in this paper to shed new empirical light on this murky relationship between monetary policy and long term interest rates we do so by looking at monetary policy innovations to the monetary base in an estimated vector autoregression var to see how monetary policy shocks impact the entire term structure of u s treasury interest rates 2 other studies that have used vars to examine this relationship have relied on innovations to the federal funds rate as their measure of monetary policy shocks berument and froyen 2006 berument and froyen 2009 edelberg and marshall 1996 evans and marshall 1998 this approach has become problematic as the federal funds rate has grown to be more predictable in recent times and thus less capable of generating monetary policy surprises in estimated vars our approach does not have this problem our study also has richer results than found in previous studies because we identify shocks to the money multiplier and real money demand in addition to the policy shock to the monetary base this allows us to examine the effect of all three monetary shocks on long term interest rates a final improvement that our study brings to this literature is that it uses long run identifying restrictions previous studies rely on short run contemporaneous restrictions that constrain the short run dynamics of the var our long run restrictions avoid this issue while at the same time imposing long run monetary neutrality on the monetary shocks for these reasons our study provides a fresh take on the relationship between monetary policy and long term interest rates using this approach we find that contrary to what the previous var studies show the federal reserve can meaningfully influence the entire term structure of interest rates we also find however that federal reserve can do so only if it maintains its inflation fighting credibility the rest of the paper proceeds as follows first we review previous findings on this issue and use them to help motivate our study second we outline the empirical methods we use to estimate the relationship between monetary policy shocks and long term interest rates third we discuss our data and construction of endogenous variables fourth we report our findings and examine how the results change over sub periods fifth the robustness of our findings are checked by examining how important the faust and leeper 1997 critique is to our identification strategy finally we conclude by discussing the implications for monetary policy ii previous findings motivating this study over the past decade there has been a spate of studies on the relationship between monetary policy and long term interest rates the methods and findings from this empirical research can be grouped into two categories on one hand there have been a number of studies using single equation models with daily data that find unanticipated changes in the federal funds rate can have a statistically significant and sizeable effect on long term interest rates beechey 2007 berument and froyen 2009 cochrane and piazzesi 2002 ellingsten and soderstrom 2003 ellingsen soderstrom and masseng 2004 gurkaynak sack and swanson 2005 kuttner 2001 poole et al

realized and optimal monetary policy rules in an estimated markov switching dsge model of the united kingdom this paper investigates underlying changes in the u k economy over the past thirty five years using a small open economy dsge model using bayesian analysis we find uk monetary policy nominal price rigidity and exogenous shocks are all subject to regime shifting a model incorporating these cha nges is used to estimate the realised monetary policy and derive the optimal mon etary policy for the uk this allows us to assess the effectiveness of the realis ed policy in terms of stabilising economic fluctuations and in turn provide an ind ication of whether there is room for monetary authorities to further improve their polic ies

the structure of interdependence in international stock markets abstract this study investigates the dynamic structure of nine major stock markets using an error correction model and directed acyclic graphs dag the dag representation provides a structure of causality among these markets in contemporaneous time building on this contemporaneous structure and the estimated error correction model innovation accounting techniques are applied the results show that the japanese market is among the most highly exogenous and the canadian and french markets among the least exogenous in our nine market study the us market is highly influenced by its own historical innovations but it is also influenced by market innovations from the uk switzerland hong kong france and germany the us market is the only market that has a consistently strong impact on price movements in other major stock markets in the longer run

firms and aggregate dynamics abstract we investigate the role of permanent and transitory shocks for firms and aggregate dynamics we find that permanent shocks to productivity and permanent shifts in the composition of output explain at least four fifths of firms dynamics however these permanent shocks are almost uncorrelated across firms and are therefore less relevant for aggregate dynamics transitory shocks on the other hand are not very important at the firm level but they account for most of the volatility of aggregate hours and output because they are significantly correlated across firms finally we try to make some progress on the interpretation of the shocks

how similar are country and sector responses to common shocks within the euro area abstract ever since the introduction of the euro there have been discussions about whether europe constitutes an optimal currency area the great recession and the european debt crisis have rekindled and intensified this debate heterogeneous country experiences have led to questioning the rationale for a common monetary policy in the absence of a common fiscal framework to cushion macroeconomic shocks in this paper we examine whether the impact of typical macroeconomic shocks at the european monetary union emu level varies across countries and sectors we follow furlanetto et al 2017 and estimate common euro area macroeconomic supply demand monetary investment and financial shocks using sign restrictions we calculate the impulse responses to these shocks at the country sector level using local linear projections and propose a measure for business cycle synchronisation based on the similarity of the responses we find varying degrees of heterogeneity across member countries responses to common emu shocks although the responses of economic sectors are themselves heterogeneous different sector decompositions across countries cannot explain the cross country heterogeneity contrary to e g bayoumi and eichengreen 1993 2017 we identify italy to be a core country in line with recent literature the level of heterogeneity was the most pronounced during the financial crisis compared to pre and post crisis periods

trend breaks long run restrictions and contractionary technology improvements abstract structural vector autoregressions with long run restrictions are extraordinarily sensitive to low frequency correlations recent literature finds that the estimated effects of technology shocks are sensitive to how one treats hours per capita however after allowing for statistically and economically significant trend breaks in productivity results are much less sensitive hours fall when technology improves the issue is that the common high low high pattern of productivity growth and hours i e the low frequency correlation inevitably leads to a positive estimated response the trend breaks control for this correlation this example suggests a practical need for care in using long run restrictions

the impact of monetary policy shocks on stock prices evidence from canada and the united states abstract using structural var models with short run restrictions appropriate for canada and the united states we empirically examine whether trade and financial market openness matter for the impact on and transmission to stock prices of monetary policy shocks we find that in canada the immediate response of stock prices to a domestic contractionary monetary policy shock is small and the dynamic response is brief whereas in the united states the immediate response of stock prices to a similar shock is relatively large and the dynamic response is relatively prolonged we find that these differences are largely driven by differences in financial market openness and hence different dynamic responses of monetary policy shocks between the two countries that we model in this paper

estimating the effects of monetary policy shocks does lag structure matter this paper examines the implications of lag structure for estimating the effects of monetary policy shocks in a var a symmetric lag structure in which all variables have the same lag length and an asymmetric lag structure in which the lag length differs across variables but is the same for a particular variable in each equation of the model are examined this is important in light of the fact that the true lag structure is generally not known four commonly used identification schemes are employed to identify monetary policy shocks monte carlo simulations strongly indicate that the lag structure of a var model does matter when assessing the quantitative effects of monetary policy shocks given the inherent uncertainty about the true lag structure in practice it is thus important that one compare the impulse response functions from both symmetric lag and asymmetric lag vars in assessing the effects of monetary policy shocks

what do technology shocks tell us about the new keynesian paradigm abstract researchers have used unanticipated changes to monetary policy to identify preference and technology parameters of macroeconomic models this paper uses changes in technology to identify the same set of parameters estimates based on technology shocks differ substantially from those based on monetary policy shocks in the post world war ii united states a positive technology shock reduces inflation and increases hours worked significantly and rapidly in both cases relative to policy shock identification technology shock identification implies i long duration durability in preferences instead of short duration habit ii built in inflation inertia disappears and price flexibility increases in response to technological improvement consumption durability increases hours worked because households temporarily increase labor supply to accumulate durables towards a new higher steady state level limited nominal rigidities allow inflation to fall because firms are able to immediately cut prices when households labor supply increases finally we consider alternative data constructions and econometric specifications we find that i and or ii hold in nearly every case

in search of the natural rate of unemployment abstract the natural rate of unemployment can be measured as the time varying steady state of a structural vector autoregression for post war us data the natural rate implied by this approach is more volatile than most previous estimates with its movements accounting for the bulk of the variation in the unemployment rate as well as substantial portions of the variation in aggregate output and inflation these movements in turn can be related to variables associated with labor market search theory including unemployment benefits labor productivity real wages and sectoral shifts in the labor market there is also a strong negative relationship between inflation and the corresponding measure of cyclical unemployment supporting the existence of a short run phillips curve

identification and estimation in non fundamental structural varma models the basic assumption of a structural vector autoregressive moving average svarma model is that it is driven by a white noise whose components are uncorrelated or independent and can be interpreted as economic shocks called structural shocks when the errors are gaussian independence is equivalent to non correlation and these models face two identification issues the first identification problem is static and is due to the fact that there is an infinite number of linear transformations of a given random vector making its components uncorrelated the second identification problem is dynamic and is a consequence of the fact that even if a svarma admits a non invertible moving average ma matrix polynomial it may feature the same second order dynamic properties as a varma process in which the ma matrix polynomials are invertible the fundamental representation the aim of this paper is to explain that these difficulties are mainly due to the gaussian assumption and that both identification challenges are solved in a non gaussian framework if the structural shocks are assumed to be instantaneously and serially independent we develop new parametric and semi parametric estimation methods that accommodate non fundamentalness in the moving average dynamics the functioning and performances of these methods are illustrated by applications conducted on both simulated and real data

the dynamic responses of crop and livestock prices to money supply shocks a bayesian analysis using long run identifying restrictions the impact of monetary policy on agriculture has been much debated this study examines the dynamic responses of u s agricultural prices to money supply shocks using three innovations first the variables responses are identified by long run money neutrality restrictions instead of the more common contemporaneous ordering second a bayesian approach to model uncertainty is used to add robustness to the estimation process third agricultural prices are disaggregated into crop and livestock components the empirical results find that both agricultural sectors benefit in the short run from positive money supply shocks with agricultural prices increasing relative to the general price level

the effects of monetary policy in japan this article interprets time series facts regarding the sources of business fluctuations in japan and attempts to uncover possible characteristics of the effects of monetary policy over the last two decades it argues that given the institutional features of the bank of japan s operating procedures a simple recursive vector autoregressive var model that consists of interest rates money stock prices and output all in first differences may serve as a useful benchmark for japan the main finding is that monetary policy shocks in fact have a persistent effect on real output especially in the rise and fall of japan s bubble economy in the late 1980s

christopher a sims and vector autoregressions three decades ago christopher a sims suggested that vector autoregressions vars are useful statistical devices for evaluating alternative macroeconomic models his suggestion has stood the test of time well in the early days vars played an important role in the evaluation of alternative models they continue to play that role today

macroeconomic fluctuations demand or supply permanent or temporary abstract we use generalized method of moments to estimate a rational expectations aggregate demand aggregate supply macroeconomic model for five european economies and the united states our aim is to examine whether supply or demand shocks have predominated in these economies during the post war era and whether shocks of either type have been primarily temporary or permanent in nature we find that permanent or temporary demand shocks have been the dominant source of variance in output growth in all six countries but there is a less consistent pattern for inflation permanent supply shocks had the dominant influence on autocorrelations

the response of hours to a technology shock a two step structural var approach the response of hours to a technology shock is a controversial issue in macroeconomics part of the difficulty lies in that the estimated response is sensitive to the specification of hours in structural vector autoregressions svars this paper uses a simple two step approach to consistently estimate the response of hours the first step considers a svar model with a relevant stationary variable but excluding hours given a consistent estimate of technology shocks in the first step the response of hours to this shock is estimated in a second step simulation experiments from an estimated dynamic stochastic general equilibrium dsge model show that this approach outperforms standard svars when applied to u s data the two step approach predicts a short run decrease followed by a hump shaped positive response this result is robust to other specifications and data

identification of technology shocks in structural vars the usefulness of svars for developing empirically plausible models is actually subject to controversies in macroeconomics we propose a two step svars based procedure which consistently estimates the effect of permanent technology shocks on aggregate variables simulation experiments from a standard business cycle model and a sticky prices model show that our approach outperforms standard svars the two step procedure when applied to actual data predicts a significant short run decrease of hours after a technology improvement followed by a hump shaped positive response additionally the rate of inflation and the nominal interest rate displays a significant decrease after this shock

the price puzzle reconsidered abstract a large literature has employed structural vector autoregressive svar models to investigate the empirical effects of u s monetary policy many of these models regularly produce a price puzzle a rise in the aggregate price level in response to a contractionary innovation to monetary policy unless commodity prices are included conventional wisdom maintains that commodity prices resolve the price puzzle because they contain information that helps the federal reserve forecast inflation i examine a number of plausible alternative indicator variables and find little correlation between an ability to forecast inflation and an ability to resolve the price puzzle additionally a sub sample investigation reveals that evidence of a price puzzle is associated primarily with the 1959 1979 sample period and that most indicators including commodity prices cannot resolve the puzzle over this period

international evidence on the long run impact of inflation in this paper i use a structural vector autoregression framework to analyze the effects of a permanent change in inflation on the long run real interest rate and real output level in 14 industrialized countries long run monetary superneutrality is rejected for all 14 countries using annual data the results indicate that a permanent increase in inflation lowers the long run real interest rate in each country a permanent increase in inflation also increases the long run real output level in a number of countries long run monetary superneutrality is also rejected for four out of the five countries examined using quarterly data under long run monetary superneutrality lrsn a per

monetary policy and exchange rate overshooting dornbusch was right after all abstract dornbusch s exchange rate overshooting hypothesis is a central building block in international macroeconomics yet empirical studies of monetary policy have typically found exchange rate effects that are inconsistent with overshooting this puzzling result has been viewed by some researchers as a stylized fact to be reckoned with in policy modelling however many of these studies in particular those using vector autoregressive vars approaches have disregarded the strong contemporaneous interaction between monetary policy and exchange rate movements by placing zero restrictions on them in contrast we achieve identification by imposing a long run neutrality restriction on the real exchange rate thereby allowing for contemporaneous interaction between the interest rate and the exchange rate in a study of four open economies we find that the puzzles disappear in particular a contractionary monetary policy shock has a strong effect on the exchange rate which appreciates on impact the maximum effect occurs within 1 2 quarters and the exchange rate thereafter gradually depreciates to baseline consistent with the dornbusch overshooting hypothesis and with few exceptions consistent with uncovered interest parity uip

the price puzzle in the monetary transmission vars with long run restrictions abstract this study addresses the price puzzle a positive response of prices to monetary tightening in var models by using long run instead of the usual short run restrictions on the us data including output prices and interest rate we find that monetary tightening had a negative effect on prices

news shocks and business cycles abstract this paper proposes and implements a novel structural var approach to the identification of news shocks about future technology the news shock is identified as the shock orthogonal to the innovation in current utilization adjusted tfp that best explains variation in future tfp a favorable news shock leads to an increase in consumption and decreases in output hours and investment on impact more suggestive of standard dsge models than of recent extensions designed to generate news driven business cycles though news shocks account for a significant fraction of output fluctuations at medium frequencies they contribute little to our understanding of recessions

sources of real exchange rate fluctuations in the nordic countries in an attempt to move beyond the purchasing power parity hypothesis this paper addresses two issues the first concerns the causes of movements in real exchange rates in contrast to the typical result supply shocks are found to dominate the long run variance decompositions for each of the four nordic countries under study this suggests that productivity developments are the most important determinant of long run movements in real exchange rates a second topic is the relative importance of stationary and non stationary components of real exchange rates also in contrast to previous findings transitory shocks are more important than permanent shocks for three of the four countries

technology shocks and robust sign restrictions in a euro area svar we use a model based identification strategy to estimate the impact of technology shocks on hours worked and employment in the euro area the sign restrictions applied in the vector autoregression var analysis are consistent with a large class of dynamic stochastic general equilibrium dsge models and are robust to parameter uncertainty the results are in line with the conventional real business cycle rbc interpretation that hours worked rise as a result of a positive technology shock by comparing the sign restrictions method to the long run restriction approach of gali quaterly journal of economics 1992 709 38 we show that the results do not depend on the stochastic specification of the hours worked series or the data sample but only on the identification scheme

the immediate challenges for the european central bank immediate challenges for the ecb issues in formulating a single monetary policy this paper discusses a number of issues that the newly constituted board of the ecb will face early on conducting a european monetary policy will be very different from living under the protective umbrella of the bundesbank we discuss voting on the ecb board and argue that the ability to communicate with the public will be critical for the success of the new institution we also ask how a single monetary policy a common change in the interest rate controlled by the ecb is transmitted to the economy of each member country we show that the monetary process differs significantly inside emu initially at least the cost of a disinflation episode could fall disproportionately on a few member countries those with both a financial structure that spreads a monetary contraction widely and a wage price structure that is relatively inflexible this process moreover is sure to evolve in part as a result of financial industry restructuring already under way but in part accentuated by the common money furthermore as the lucas principle suggests the wage price process itself will adapt to the changing focus of european monetary policy rudi dornbusch carlo favero and francesco giavazzi

what moves oecd real interest rates this paper conducts a structural time series analysis of ex ante real interest rates of the five major oecd economies the relationships of rates to permanent and temporary real and nominal shocks appear to be qualitatively consistent with predictions of stochastic general equilibrium business cycle models u s real and nominal shocks are found to be the most important causes of persistence in rates but only nominal shocks cause dynamic movements that are coherent across all countries the rise in real interest rates in the early 1980s was mainly due to nominal shocks real shocks played little or no role

estimating the liquidity effect in post reform chile do inflationary expectations matter abstract in this paper we estimate the dynamic effects of domestic money supply shocks in chile over its post reform era we analyze chile since inflationary expectations could be very sensitive to changes in the money supply given past inflationary experience in the context of a var model containing both chilean and us variables we identify money supply shocks using long run monetary neutrality and block exogeneity restrictions our findings suggest that in chile over the period from 1977 to 1998 unexpected domestic money supply shocks have had a positive impact on interest rates in the short run and a negative impact on real money balances this differs markedly from the estimated responses of the us the findings are consistent with the notion that at least in chile inflationary expectations are very sensitive to news about the nominal money supply possibly due to high inflationary uncertainty and the lack of credibility of monetary reforms our results are generally robust to alternative model specification and identifying restrictions

a new look at pass through abstract this paper examines the relationship between exchange rates and prices rather than assuming exchange rate changes are exogenous shocks that affect prices i use a long run restrictions var to identify shocks and explore the way domestic prices import prices and exchange rates react to a variety of shocks consumer price pass through is nearly complete in response to some shocks but low in response to others alternatively import prices and exchange rates typically respond in the same direction and pass through seems quick this supports the idea that import prices are set in the producer s currency and that lower cpi pass through is a result of changes in quantities or margins further down the supply chain

hours per capita and productivity evidence from correlated unobserved components models recent studies debate the effect of a permanent productivity shock on hours per capita within a structural var context this paper examines the issue using a correlated unobserved components uc framework the estimates show that permanent shocks to productivity are negatively correlated with transitory shocks to hours this result is robust for non stationary or levels stationary specifications of hours model comparisons indicate that the data do not favor imposing var type restrictions on the uc models copyright 2008 john wiley sons ltd

bayesian counterfactual analysis of the sources of the great moderation we use counterfactual experiments to investigate the sources of the large volatility reduction in us real gdp growth in the 1980s contrary to an existing literature that conducts counterfactual experiments based on classical estimation and point estimates we consider bayesian analysis that provides a straightforward measure of estimation uncertainty for the counterfactual quantity of interest using blanchard and quah s 1989 structural var model of output growth and the unemployment rate we find strong statistical support for the idea that a counterfactual change in the size of structural shocks alone with no corresponding change in the propagation of these shocks would have produced the same overall volatility reduction as what actually occurred looking deeper we find evidence that a counterfactual change in the size of aggregate supply shocks alone would have generated a larger volatility reduction than a counterfactual change in the size of aggregate demand shocks alone we show that these results are consistent with a standard monetary var for which counterfactual analysis also suggests the importance of shocks in generating the volatility reduction but with the counterfactual change in monetary shocks alone generating a small reduction in volatility copyright 2007 john wiley sons ltd

asset prices exchange rates and the current account this paper analyses the role of asset prices in comparison to other factors in particular exchange rates as a driver of the us trade balance it employs a bayesian structural var model that requires imposing only a minimum of economically meaningful sign restrictions we find that equity market shocks and housing price shocks have been major determinants of the us current account in the past accounting for up to 30 of the movements of the us trade balance at a horizon of 20 quarters by contrast shocks to the real exchange rate have been less relevant explaining about 9 and exerting a more temporary effect on the us trade balance our findings suggest that large exchange rate movements may not necessarily be the key element of an adjustment of today s large current account imbalances and that in particular relative global asset price changes could be a potent source of adjustment

applied cointegration analysis in the mirror of macroeconomic theory summary cointegration analyses of macroeconomic time series are often not based on fully specified theoretical models we use a theoretical model to scrutinize common procedures in applied cointegration analysis monte carlo experiments show that 1 some tests of the cointegration vectors do not work well on series generated by an equilibrium business cycle model 2 cointegration restrictions add little to forecasting 3 structural var models based on weak long run restrictions seem to work well the main disadvantages of cointegration analysis without strong links to economic theory are that it makes it hard to estimate and interpret the cointegration vectors

nominal shocks and real exchange rates evidence from two centuries abstract this paper employs structural vector autoregression methods to examine the contribution of real and nominal shocks to real exchange rate movements using two hundred and seventeen years of data from britain and the united states shocks are identified with long run restrictions the long time series makes possible an investigation of how the role of nominal shocks has evolved over time due to changes in the shock processes or to structural changes in the economy which might alter how a shock is transmitted to the real exchange rate the sample is split at 1913 which is the end of the classical gold standard period the last of the monetary regimes of the 19th century the earlier subsample 1795 1913 shows a much stronger role for nominal shocks in explaining real exchange rate movements than the later subsample 1914 2010 counterfactual analysis shows that the difference between the two periods is mainly due to the size of the nominal shocks rather than structural changes in the economy these findings are consistent with the view that the financial instability and frequent deflation of the 19th century had real economic effects

the effects of technology shocks on hours and output a robustness analysis we analyze the effects of neutral and investment specific technology shocks on hours and output long cycles in hours are removed in a variety of ways hours robustly fall in response to neutral shocks and robustly increase in response to investment specific shocks the percentage of the variance of hours output explained by neutral shocks is small large the opposite is true for investment specific shocks news shocks are uncorrelated with the estimated technology shocks copyright 2009 john wiley sons ltd