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NEWS SHOCKS AND THE EFFECTS OF MONETARY POLICY

Published online by Cambridge University Press:  23 April 2021

Ren Zhang
Ren Zhang*
Affiliation:
Texas State University
*
Address correspondence to: Ren Zhang, Department of Finance and Economics, McCoy College of Business Administration, Texas State University, 519 McCoy Hall, San Marcos, Texas, 78666, USA. e-mail: r_z79@txstate.edu. Phone:+1 (469) 394-3198.
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Abstract

Traditionally identified monetary shocks in a structural vector autoregression (SVAR) model typically result in long-lasting effects on output and total factor productivity (TFP). In this paper, I argue that the typical monetary shock has been confounded with the news shock about future technology. I propose and implement a novel SVAR approach that effectively “cleans” the technology component from the traditional Cholesky monetary shock. With the new identification, I find that a monetary shock exerts smaller and less persistent effects on output and the level of measured TFP than a traditionally identified monetary shock. Finally, I show that the SVAR impulse responses can be replicated by augmenting the standard New Keynesian model with a time-varying inflation target and a non-Ricardian fiscal policy regime.

Keywords

Monetary PolicyNews ShockVAR ModelFiscal Theory of Price Level
Type
Articles
Information
Macroeconomic Dynamics , Volume 26 , Issue 7 , October 2022 , pp. 1923 - 1963
Copyright
© Cambridge University Press 2021

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Footnotes

I owe my deepest gratitude to my Ph.D advisor at Southern Methodist University, Nathan Balke, for his continuous help and invaluable advice. I also thank Lian An, John Cochrane, Pavel Kapinos, Xiaohan Ma, Enrique Martinez-Garcia, Jian Wang, Mark Wynne as well as seminar participants at Federal Reserve Bank of Dallas, Canadian Economic Association Meeting and Southern Economic Association Meeting for their helpful comments and suggestions. I would like to thank the Research Enhancement Program at Texas State University for financial support. All remaining errors are mine alone.

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