Working Paper: CEPR ID: DP16836
Authors: Rüdiger Bachmann; Eric Sims; Isabel Goedl-Hanisch
Abstract: We identify monetary policy shocks by exploiting variation in the central bank’sinformation set. To be specific, we use differences between nowcasts of the outputgap and inflation with final, revised estimates of these series to isolate movements inthe policy rate unrelated to economic conditions. We then compute the effects of amonetary policy shock on the aggregate economy using local projection methods. Wefind that a contractionary monetary policy shock has a limited negative effect on outputbut a persistent negative impact on prices. In contrast to alternative identificationapproaches, we do not observe a price puzzle when analyzing the period from 1987to 2008. Further, we validate the identification approach in a simple New Keynesianmodel, augmented by the assumption that the central bank observes the ingredients ofthe Taylor rule with error.
Keywords: Identification; Nowcasts; Monetary Policy Shocks; Local Projections
JEL Codes: E31; E50; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Contractionary monetary policy shock (E49) | output (C67) |
| Contractionary monetary policy shock (E49) | prices (P22) |
| Nowcast errors in output gap and inflation (E39) | contractionary monetary policy shock (E49) |
| Contractionary monetary policy shock (E49) | output and prices (P22) |