Working Paper: CEPR ID: DP4106
Authors: Andreas Beyer; Roger E. A. Farmer
Abstract: We propose a method for estimating a subset of the parameters of a structural rational expectations model by exploiting changes in policy. We define a class of models, midway between a vector autoregression and a structural model, that we call the recoverable structure. We provide an application of our method by estimating the parameters of a three equation model of the monetary transmission mechanism using data from 1970:Q1 to 1999:Q4. We estimate a vector autoregression and find that the parameters of this VAR are unstable. However, using our proposed identification method we are able to attribute instability in the parameters of the VAR solely to changes in the parameters of the policy rule. We recover parameter estimates of the recoverable structure and we demonstrate that these parameters are invariant to changes in policy. Since the recoverable structure includes future expectations as explanatory variables our parameter estimates are not subject to the Lucas Critique of Econometric Policy Evaluation.
Keywords: Fed; Identification; Monetary Transmission; Recoverable Structure; Structural Breaks
JEL Codes: C51; E43; E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Changes in monetary policy (E52) | Parameters of the VAR model (C32) |
| Shifts in the policy rule (E61) | Instability in parameter estimates (C51) |
| Policy changes (J18) | Parameters of the monetary transmission mechanism (E52) |
| Recoverable structure (Y20) | Stability of parameters despite policy changes (E61) |
| Changes in monetary policy (E52) | Instability in parameter estimates (C51) |