Monetary Policy, Real Activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs
American Economic Journal: Macroeconomics
vol. 11,
no. 1, January 2019
(pp. 157-92)
Abstract
In this paper we develop a Bayesian framework to estimate a proxy structural vector autoregression to identify monetary policy shocks. We find that during the Great Moderation period, monetary policy shocks induce a persistent decline in real activity and tightening in financial conditions. Central to this result is a systematic component of monetary policy characterized by a direct and economically significant reaction to changes in corporate credit spreads. The failure to account for this endogenous reaction induces an attenuation in the response of all variables to monetary shocks, a result that also applies to the narrative identification of Romer and Romer (2004).Citation
Caldara, Dario, and Edward Herbst. 2019. "Monetary Policy, Real Activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs." American Economic Journal: Macroeconomics, 11 (1): 157-92. DOI: 10.1257/mac.20170294Additional Materials
JEL Classification
- C32 Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
- E23 Macroeconomics: Production
- E32 Business Fluctuations; Cycles
- E44 Financial Markets and the Macroeconomy
- E52 Monetary Policy
- E58 Central Banks and Their Policies
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