A new approach to measuring economic policy shocks, with an application to conventional and unconventional monetary policy

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: We propose a new approach to analyze economic shocks. Our new procedure identifies economic shocks as exogenous shifts in a function; hence, we call them "functional shocks". We show how to identify such shocks and how to trace their effects in the economy via VARs using "VARs with functional shocks" and "functional local projections". Using our new procedure, we address the crucial question of studying the effects of monetary policy by identifying monetary policy shocks as shifts in the whole term structure of government bond yields in a narrow window of time around monetary policy announcements. Our approach sheds new light on the effects of monetary policy shocks, both in conventional and unconventional periods, and shows that traditional identification procedures may miss important effects. Our new procedure has the advantage of identifying monetary policy shocks during both conventional and unconventional monetary policy periods in a unified manner and can be applied more generally to other economic shocks.

Keywords: Shock identification; VARs; zero-lower bound; unconventional monetary policy; forward guidance. (search for similar items in EconPapers)
JEL-codes: D1 E21 E4 E52 H31 I3 (search for similar items in EconPapers)
Date: 2018-10, Revised 2021-04
New Economics Papers: this item is included in nep-cba, nep-ecm, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (32)

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Related works:
Journal Article: A new approach to measuring economic policy shocks, with an application to conventional and unconventional monetary policy (2021)
Working Paper: A New Approach to Measuring Economic Policy Shocks, with an Application to Conventional and Unconventional Monetary Policy (2019)
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