The transmission of monetary policy shocks

Commonly used instruments for the identification of monetary policy disturbances are likely to combine the true policy shock with information about the state of the economy due to the information disclosed through the policy action. We show that this signalling effect of monetary policy can give rise to the empirical puzzles reported in the literature, and propose a new high-frequency instrument for monetary policy shocks that accounts for informational rigidities. We find that a monetary tightening is unequivocally contractionary, with deterioration of domestic demand, labor and credit market conditions, as well as of asset prices and agents' expectations

Bayesian vector autoregressions

This article reviews Bayesian inference methods for Vector Autoregression models, commonly used priors for economic and financial variables, and applications to structural analysis and forecasting

Bayesian vector autoregressions

This article reviews Bayesian inference methods for Vector Autoregression models, commonly used priors for economic and financial variables, and applications to structural analysis and forecasting

The transmission of monetary policy shocks

Despite years of research, there is still uncertainty around the effects of monetary policy shocks. We reassess the empirical evidence by combining a new identification that accounts for informational rigidities, with a flexible econometric method robust to misspecifications that bridges between VARs and Local Projections. We show that most of the lack of robustness of the results in the extant literature is due to compounding unrealistic assumptions of full information with the use of severely misspecified models. Using our novel methodology, we find that a monetary tightening is unequivocally contractionary, with no evidence of either price or output puzzles

Unsurprising shocks: information, Premia, and the Monetary Transmission

This article studies the information content of monetary surprises, i.e. the reactions of financial markets to monetary policy announcements. We find that monetary surprises are predictable by past information, and can incorporate anticipatory effects. Surprises are decomposed into monetary policy shocks, forecast updates, and time-varying risk premia, all of which can change following the announcements. Hence, their use as identification devices is not warranted, and can have strong qualitative and quantitative implications for the estimated responses of variables to the shocks. We develop new measures for monetary policy shocks, independent of central banks’ forecasts and unpredictable by past information

Bayesian vector autoregressions : applications

Bayesian vector autoregressions (BVARs) are standard multivariate autoregressive models routinely used in empirical macroeconomics and finance for structural analysis, forecasting, and scenario analysis in an ever-growing number of applications

When creativity strikes: news shocks and business cycle fluctuations

We use monthly US utility patent applications to construct an external instrument for identification of technology news shocks in a rich-information VAR. Technology diffuses slowly, and affects total factor productivity in an S-shaped pattern. Responsible for about a tenth of economic fluctuations at business cycle frequencies, the shock elicits a slow, but large and positive response of quantities, and a sluggish contraction in prices, followed by an endogenous easing in the monetary stance. The ensuing economic expansion substantially anticipates any material increase in TFP. Technology news are strongly priced-in in the stock market on impact, but measures of consumers’ expectations take sensibly longer to adjust, consistent with a New-Keynesian framework with nominal rigidities, and featuring informationally constrained agents

Uncertain kingdom: nowcasting GDP and its revisions

We design a new econometric framework to nowcast macroeconomic data subject to revisions, and use it to predict UK GDP growth in real-time. To this aim, we assemble a novel dataset of monthly and quarterly indicators featuring over ten years of real-time data vintages. Successive monthly estimates of GDP growth for the same quarter are treated as correlated observables in a Dynamic Factor Model (DFM) that also includes a large number of mixed-frequency predictors, leading to the release-augmented DFM (RA-DFM). The framework allows for a simple characterisation of the stochastic process for the revisions as a function of the observables, and permits a detailed assessment of the contribution of the data flow in informing (i) forecasts of quarterly GDP growth; (ii) the evolution of forecast uncertainty; and (iii) forecasts of revisions to early released GDP data. By evaluating the real-time performance of the RA-DFM, we find that the model’s predictions have information about the latest GDP releases above and beyond that contained in the statistical office earlier estimates; predictive intervals are well-calibrated; and UK GDP growth real-time estimates are commensurate with professional nowcasters. We also provide evidence that statistical office data on production and labour markets, subject to large publication delays, account for most of the forecastability of the revisions

Identification with external instruments in structural VARs under partial invertibility

This paper discusses the conditions for identification in SVAR-IVs when only the shock of interest or a subset of the structural shocks can be recovered as a linear combination of the VAR residuals. This condition of partial invertibility is very general, often of empirical relevance, and less stringent than the standard full invertibility that is routinely assumed in the SVAR literature. We show that, underpartial invertibility, the dynamic responses can be correctly recovered using an external instrument even when this correlates with leads and lags of other invertible shocks. We call this a limited lead-lag exogeneity condition. We evaluate our results in a simulated environment, and provide an empirical application to the case of monetary policy shocks