- The interest rate ( _ir_ ) is the average interest rate for loans between domestic financial institutions (period average) released by BCRA.

- The exchange rate ( _er_ ) is BCRA’s reference exchange rate (period average).

Since identification in (20) is achieved by exploiting linear relationships, it is not possible to resort to log levels for normalization (Strongin [40]). Monetary stock variables and _ca_ are therefore normalized by the lag of a 36-month moving average of _cp_ .<sup>12</sup> Normalized series are plotted in Figure 4 (Appendix C).

Specification tests are presented in Appendix C. In a nutshell, the AIC suggests one should prefer the model with three lags to the one with two lags, and the latter to the one with only one lag, while based on the other information criteria the preference relation is reversed. The model with two lags should be preferred in terms of compliance with both the assumption of no serial autocorrelation and of normality of the residuals. On the contrary, these two assumptions and the one of homoskedasticity seem to be violated in the specification wih only one lag. On the other hand, the VAR(3) specification conforms slightly better to homoskedasticity than the VAR(2). In light of these considerations, we are inclined to present the results obtained with the model with two lags. For the sake of robustness, however, all estimates presented here were compared to the ones of the model with three lags. These were not not qualitatively different from the ones presented here, and are available from the author upon request.<sup>13</sup>

# **4.2 Estimation and results**

The structural model is estimated via full information maximum likelihood. 95 % confidence intervals for impulse response functions are computed using the bootstrap procedure described in Christiano et al. [9],<sup>14</sup> represented by the dashed lines in the figures to be introduced below.

is, then, that the fact that the BCRA passively accommodates to the excess liquidity the banks wish to collocate in reverse repos in the short run. The same reasoning applies to Iliquidity rediscounts, which were a major source of liquidity during the first years of the period under analysis, when they were used to face the deposit withdrawals that followed the pesification of the latter. While the BCRA had established a schedule for the cancellation of these rediscounts, the bulk of them was cancelled in advance of that schedule.

> 12Strongin [40], Bernanke and Mihov [6] and others normalize U.S. data by a moving average of total reserves. In the present study, the closest analogue of total reserves is _li_ . However, this last variable remains negative until 2004.

> 13With _T_ = 66, we are left with only 43 and 32 degrees of freedom in the VAR(2) and VAR(3) specifications, respectively. This notwithstanding, Bernanke and Mihov [6] rely on a similar amount of degrees of freedom for their short sub-sample 1988-1996. Their 100-observations sample is further reduced because of using a maximum lag of 11. The remaining 89 observations are used to estimate a VAR with an intercept and lags 1 to 6, 8, 10, and 11. This leaves them with as many as 34 degrees of freedom, notably lower than the ones left in other sub-samples, ranging from 100 to 305 for the whole sample, although parameter stability is a problem when the whole sample is used (see Bagliano and Favero [2]).

> 14First, the following procedure is repeated 200 times: (i) from the residuals of the estimated model, draw a random sample of size equal to the sample size _T_ , with replacement; (ii) based on this new set of residuals, construct the series included in the model using the estimated coefficients and the historical initial conditions; (iii) then re-estimate the VAR using this artificially generated sample, and calculate its IRFs. Then, for each lag, order the 200 impulse responses from smallest to largest. The lower and upper boundaries are the corresponding percentiles in this ordering. See Christiano et al. [9], p. 22, footnote 23.

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