International Finance Discussion Papers

Using Measures of Expectations to Identify the Effects of a Monetary Policy Shock Allan D. Brunner 1996-537

The empirical results are quite surprising. First, when expectations are incorporated, the variance of all innovations is reduced substantially. Second, innovations to the federal funds rate derived using the alternative approach are only somewhat correlated with their VAR counterparts, while innovations to other economic variables are essentially uncorrelated. Still, monetary policy shocks derived using both approaches are still somewhat correlated, however, since innovations to prices and economic activity explain only a small fraction of innovations to the federal funds rate. As a consequence, the impulse responses of economic variables to the two sets of monetary policy shocks have remarkably similar properties.

Full paper (2239 KB PDF)

PDF files: Adobe Acrobat Reader   ZIP files: PKWARE