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Decomposing the Effects of Monetary Policy Using an External Instruments SVAR

Lakdawala, Aeimit (2016): Decomposing the Effects of Monetary Policy Using an External Instruments SVAR.

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Abstract

We study the effects of monetary policy on economic activity separately identifying the effects of a conventional change in the fed funds rate from the policy of forward guidance. We use a structural VAR identified using external instruments from futures market data. The response of output to a fed funds rate shock is found to be consistent with typical monetary VAR analyses. However, the effect of a forward guidance shock that increases long-term interest rates has an expansionary effect on output. This counterintuitive response is shown to be tied to the asymmetric information between the Federal Reserve and the public.

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