Hostname: page-component-cd9895bd7-jkksz Total loading time: 0 Render date: 2024-12-28T21:56:02.990Z Has data issue: false hasContentIssue false
  • English
  • Français

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.
Get access Rights & Permissions [Opens in a new window]

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

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.

References

Ahmadi, P.A. and Uhlig, H. (2015) Sign restrictions in Bayesian FAVARs with an application to monetary policy shocks. NBER Working Paper No. 21738. CrossRefGoogle Scholar
An, L., Wynne, M., and Zhang, R. (2020) Shock-dependent exchange rate pass-through: Evidence based on a narrative sign approach. Federal Reserve Bank of Dallas Globalization and Monetary Policy Institute Working Paper (379).CrossRefGoogle Scholar
Antolίn-Dίaz, J. and Rubio-Ramrez, J. F. (2018) Narrative sign restrictions for SVARs. The American Economic Review 108(10), 2802–2829.CrossRefGoogle Scholar
Balke, N. S., Zeng, Z., and Zhang, R. (in press) Identifying credit demand, financial intermediation, and supply of funds shocks: A structural VAR approach. The North American Journal of Economics and Finance. Google Scholar
Barsky, R. B. and Sims, E. R. (2011) News shocks and business cycles. Journal of Monetary Economics 58(3), 273–289.Google Scholar
Basu, S. and Fernald, J. G. (1997) Returns to scale in US production: Estimates and implications. Journal of Political Economy 105(2), 249–283.CrossRefGoogle Scholar
Basu, S., Fernald, J. G., and Kimball, M. S. (2006) Are technology improvements contractionary? The American Economic Review 96(5), 1418–1448.CrossRefGoogle Scholar
Beaudry, P. and Lucke, B. (2010) Letting different views about business cycles compete. NBER Macroeconomics Annual 24(1), 413–456.CrossRefGoogle Scholar
Beaudry, P. and Portier, F. (2006) Stock prices, news, and economic fluctuations. The American Economic Review 96(4), 1293–1307.CrossRefGoogle Scholar
Ben Zeev, N., Gunn, C., and Khan, H. (2020) Monetary news shocks. Journal of Money, Credit and Banking 52(7), 1793–1820.Google Scholar
Ben Zeev, N. and Khan, H. (2015) Investment-specific news shocks and US business cycles. Journal of Money, Credit and Banking 47(7), 1443–1464.CrossRefGoogle Scholar
Ben Zeev, N. and Pappa, E. (2017) Chronicle of a war foretold: The macroeconomic effects of anticipated defence spending shocks. The Economic Journal 127(603), 1568–1597.CrossRefGoogle Scholar
Bernanke, B. S., Boivin, J., and Eliasz, P. (2005) Measuring the effects of monetary policy: A factor-augmented vector autoregressive (FAVAR) approach. Quarterly Journal of Economics 120(1), 387–422.Google Scholar
Bernanke, B. S., Gertler, M., Watson, M., Sims, C. A., and Friedman, B. M. (1997) Systematic monetary policy and the effects of oil price shocks. Brookings Papers on Economic Activity 1997(1), 91–157.CrossRefGoogle Scholar
Binning, A. (2013) Underidentified SVAR models: A framework for combining short and long-run restrictions with sign-restrictions. Norges Bank Working Paper. Google Scholar
Blanchard, O. J., L’Huillier, J.-P., and Lorenzoni, G. (2013) News, noise, and fluctuations: An empirical exploration. The American Economic Review 103(7), 3045–70.CrossRefGoogle Scholar
Blinder, A. S. (1982) The anatomy of double-digit inflation in the 1970s. In Inflation: Causes and Effects, pp. 261–282. University of Chicago Press.Google Scholar
Boivin, J., Giannoni, M. P., and Mihov, I. (2009) Sticky prices and monetary policy: Evidence from disaggregated US data. The American Economic Review 99(1), 350–84.CrossRefGoogle Scholar
Bomfim, A. N. and Rudebusch, G. D. (2000) Opportunistic and deliberate disinflation under imperfect credibility. Journal of Money, Credit and Banking 32(4), 707–721.CrossRefGoogle Scholar
Bouakez, H., Kemoe, L., et al. (2017) News shocks, business cycles, and the disinflation puzzle. Cahiers de recherche, 05–2017.Google Scholar
Carlstrom, C. T., Fuerst, T. S., and Paustian, M. (2009) Monetary policy shocks, Choleski identification, and DNK models. Journal of Monetary Economics 56(7), 1014–1021.Google Scholar
Christiano, L., Ilut, C. L., Motto, R., and Rostagno, M. (2010) Monetary policy and stock market booms. NBER Working Paper, No. 16402. Google Scholar
Christiano, L. J., Eichenbaum, M., and Evans, C. L. (1999) Monetary policy shocks: What have we learned and to what end? Handbook of Macroeconomics 1, 65–148.CrossRefGoogle Scholar
Christiano, L. J., Eichenbaum, M., and Evans, C. L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113(1), 1–45.CrossRefGoogle Scholar
Cochrane, J. H. (1998) What do the VARs mean? Measuring the output effects of monetary policy. Journal of Monetary Economics 41(2), 277–300.CrossRefGoogle Scholar
Cochrane, J. H. (2011) Determinacy and identification with Taylor rules. Journal of Political Economy 119(3), 565–615.CrossRefGoogle Scholar
Cochrane, J. H. (2014) Monetary policy with interest on reserves. Journal of Economic Dynamics and Control 49, 74–108.CrossRefGoogle Scholar
Cochrane, J. H. (2018a) The fiscal theory of the price level. Unpublished Manuscript. Google Scholar
Cochrane, J. H. (2018b) Stepping on a rake: The fiscal theory of monetary policy. European Economic Review 101, 354–375.Google Scholar
Coibion, O. (2012) Are the effects of monetary policy shocks big or small? American Economic Journal: Macroeconomics 4(2), 1–32.Google Scholar
Fernald, J. G. (2014) A quarterly, utilization-adjusted series on total factor productivity. Federal Reserve Bank of San Francisco Working Paper Series 2012-19. Google Scholar
Forni, M., Gambetti, L., Lippi, M., and Sala, L. (2017) Noisy news in business cycles. American Economic Journal: Macroeconomics 9(4), 122–152.Google Scholar
Friedman, M. and Schwartz, A. J. (1963) A Monetary History of the United States, 1867-1960. Princeton University Press.Google Scholar
Gambetti, L., Korobilis, D., Tsoukalas, J., and Zanetti, F. (2017) The effect of news shocks and monetary policy. Unpublished Manuscript. Google Scholar
Gertler, M. and Karadi, P. (2015) Monetary policy surprises, credit costs, and economic activity. American Economic Journal: Macroeconomics 7(1), 44–76.Google Scholar
Hanson, M. S. (2004) The price puzzle reconsidered. Journal of Monetary Economics 51(7), 1385–1413.CrossRefGoogle Scholar
Hetzel, R. L. (1998) Arthur Burns and inflation. Federal Reserve Bank of Richmond Economic Quarterly 84(1).Google Scholar
Ireland, P. N. (2007) Changes in the Federal Reserve’s inflation target: Causes and consequences. Journal of Money, Credit and Banking 39(8), 1851–1882.CrossRefGoogle Scholar
Jaimovich, N. and Rebelo, S. (2009) Can news about the future drive the business cycle? The American Economic Review 99(4), 1097–1118.Google Scholar
Jia, C. (2019) The informational effect of monetary policy and the case for policy commitment. FRB of Cleveland Working Paper 19-07. CrossRefGoogle Scholar
Kapinos, P. (2011) Forward-looking monetary policy and anticipated shocks to inflation. Journal of Macroeconomics 33(4), 620–633.CrossRefGoogle Scholar
Khan, H. and Tsoukalas, J. (2012) The quantitative importance of news shocks in estimated DSGE models. Journal of Money, Credit and Banking 44(8), 1535–1561.CrossRefGoogle Scholar
Kilian, L. (1998) Small-simple confidence intervals for impulse response functions. Review of Economics and Statistics 80(2), 218–230.Google Scholar
Kurmann, A. and Otrok, C. (2013) News shocks and the slope of the term structure of interest rates. The American Economic Review 103(6), 2612–2632.CrossRefGoogle Scholar
Kurmann, A. and Otrok, C. (2014) News shocks and inflation: Lessons for New Keynesians. Unpublished Manuscript. Google Scholar
Kurmann, A. and Sims, E. (2017) Revisions in utilization-adjusted TFP and robust identification of news shocks. Review of Economics and Statistics, 1–45.CrossRefGoogle Scholar
Leeper, E. M. (1991) Equilibria under ‘active’ and ‘passive’ monetary and fiscal policies. Journal of Monetary Economics 27(1), 129–147.CrossRefGoogle Scholar
Ma, X. (2018) Investment specific technology, news, sentiment, and fluctuations: Evidence from nowcast data. Journal of Macroeconomics 57, 55–70.CrossRefGoogle Scholar
Mayer, T. (1999) Monetary Policy and the Great Inflation in the United States. Edward Elgar Publishing.Google Scholar
Meier, M., Reinelt, T., et al. (2020) Monetary policy, markup dispersion, and aggregate TFP.CrossRefGoogle Scholar
Milani, F. and Treadwell, J. (2012) The effects of monetary policy “news” and “surprises”. Journal of Money, Credit and Banking 44(8), 1667–1692.Google Scholar
Moran, P. and Queralto, A. (2018) Innovation, productivity, and monetary policy. Journal of Monetary Economics 93, 24–41.CrossRefGoogle Scholar
Nakamura, E. and Steinsson, J. (2018) High frequency identification of monetary non-neutrality: The information effect. Quarterly Journal of Economics 133(3), 1283–1330.CrossRefGoogle Scholar
Nam, D. and Wang, J. (2015) The effects of surprise and anticipated technology changes on international relative prices and trade. Journal of International Economics 97(1), 162–177.CrossRefGoogle Scholar
Orphanides, A. and Wilcox, D. W. (2002) The opportunistic approach to disinflation. International Finance 5(1), 47–71.CrossRefGoogle Scholar
Pinter, G. (2018) Macroeconomic shocks and risk premia. Unpublished Manuscript. Google Scholar
Pinter, G., Theodoridis, K., and Yates, A. (2013) Risk news shocks and the business cycle. Unpublished Manuscript. Google Scholar
Ramaswamy, R. and Sloek, T. (1998) The real effects of monetary policy in the European Union: What are the differences? IMF Staff Papers 45(2), 374–396.CrossRefGoogle Scholar
Ramey, V. A. (2016) Macroeconomic shocks and their propagation. In Handbook of Macroeconomics, Volume 2, pp. 71–162. Elsevier.Google Scholar
Romer, C. D. and Romer, D. H. (2004) A new measure of monetary shocks: Derivation and implications. The American Economic Review 94(4), 1055–1084.Google Scholar
Rubio-Ramirez, J. F., Waggoner, D. F., and Zha, T. (2010) Structural vector autoregressions: Theory of identification and algorithms for inference. The Review of Economic Studies 77(2), 665–696.Google Scholar
Schmitt-Grohé, S. and Uribe, M. (2012) What’s news in business cycles. Econometrica 80(6), 2733–2764.Google Scholar
Sims, C. A. (1980) Macroeconomics and reality. Econometrica 48(1), 1–48.Google Scholar
Sims, C. A. (1994) A simple model for study of the determination of the price level and the interaction of monetary and fiscal policy. Economic Theory 4(3), 381–399.CrossRefGoogle Scholar
Sims, C. A. (2002) Solving linear rational expectations models. Computational Economics 20(1), 1–20.CrossRefGoogle Scholar
Sims, C. A. (2011) Stepping on a rake: The role of fiscal policy in the inflation of the 1970s. European Economic Review 55(1), 48–56.Google Scholar
Sims, C. A. (2013) Paper money. The American Economic Review 103(2), 563–584.CrossRefGoogle Scholar
Smets, F. and Wouters, R. (2007) Shocks and frictions in us business cycles: A bayesian dsge approach. American Economic Review 97(3), 586–606.CrossRefGoogle Scholar
Stock, J. H. and Watson, M. W. (2018) Identification and estimation of dynamic causal effects in macroeconomics using external instruments. The Economic Journal 128(610), 917–948.CrossRefGoogle Scholar
Uhlig, H. (2005) What are the effects of monetary policy on output? Results from an agnostic identification procedure. Journal of Monetary Economics 52(2), 381–419.CrossRefGoogle Scholar
Uribe, M. (2018) The Neo-Fisher effect: Econometric evidence from empirical and optimizing models. NBER Working Paper No. 25089. CrossRefGoogle Scholar
Woodford, M. (1995) Price-level determinacy without control of a monetary aggregate. In Carnegie-Rochester Conference Series on Public Policy, Volume 43, pp. 1–46. Elsevier.Google Scholar
Woodford, M. (2003) Interest and prices. Princeton University Press.Google Scholar
Wu, J. C. and Xia, F. D. (2016) Measuring the macroeconomic impact of monetary policy at the zero lower bound. Journal of Money, Credit and Banking 48(2-3), 253–291.CrossRefGoogle Scholar
Zhang, R., Martίnez-Garcίa, E., Wynne, M., and Grossman, V. (in press) Ties that bind: Estimating the natural rate of interest for small open economies. Journal of International Money and Finance. Google Scholar