The paper builds a parsimonious US business cycle SVARMA model, establishing identification conditions for independent monetary shocks. The SVARMA model, utilizing Divisia M3 and Divisia M4, is compared to the simple sum M2. The monetary rule with Divisia M3 yields theoretically consistent results marked by the absence of the usual price and liquidity puzzles. As the Federal Reserve (Fed) took a more hawkish approach to curb inflation, significant increases in US interest rates and declines in monetary aggregates were largely influenced by the Fed’s reaction function, which incorporates the Divisia M3 monetary rule. Findings emphasize the monetary impact on the business cycle, highlighting the significance of Divisia monetary aggregates. Historical and variance decompositions reveal diverse, dynamic effects of monetary shocks on macroeconomic variables. The SVARMA model with Divisia M3 and M4 demonstrates superior performance over simple sum M2 in capturing the time path of monetary shocks.

We assess the responses of output and inflation to monetary policy shocks in the context of a Bayesian, monetary structural vector autoregressive model. We allow money supply and leverage measures to enter into the interest rate policy rule and use an identification approach that is by construction devoid of any price puzzles. We provide a comprehensive comparison between monetary policy shocks under a policy regime that follows a standard Taylor rule and those that augment the standard reaction function of the central bank with measures of leverage and the money supply. We find that contractionary monetary policy is more pronounced and persistent when the reaction function of the central bank is augmented with measures of money and leverage than when the reaction function follows a typical Taylor rule. Our results support the use and inclusion of monetary aggregates in monetary policy and business cycle analysis.

We employ a non-recursive identification scheme to identify the effects of a monetary policy shock in a Structural Vector Autoregressive (SVAR) model for the US post-WWII quarterly data. The identification of the shock is achieved via heteroskedasticity, and different on-impact macroeconomic responses are allowed for (but not imposed) in each volatility regime. We show that the impulse responses obtained with the suggested non-recursive identification scheme are quite similar to those conditional on a recursive VAR estimated with pre-1984 data. In contrast, recursive vs. non-recursive identification schemes return different short-run responses of output and investment during the Great Moderation. Robustness checks dealing with a different definition of investment, an alternative break-point, and federal funds futures rates as an indicator of the monetary policy stance are documented and discussed.

We investigate the effects of monetary policy shocks in the new European Union (EU) member states the Czech Republic, Hungary, Poland, and Slovakia. In contrast to existing studies, we explicitly account for external developments in European Monetary Union (EMU) countries and in other acceding countries. We do so by using factor-augmented vector autoregressive models that employ information from nonstationary factor time series. One set of VAR models includes factors obtained from a large cross section of time series from EMU countries, whereas another set includes factors obtained from other acceding countries. We find that including EMU factors does change impulse response patterns in some but not all acceding countries. In contrast, including factors from other acceding countries leads to substantial changes in impulse responses and to economically more plausible results. Overall, our analysis highlights that taking external economic developments properly into account is crucial for the analysis of monetary policy in the new EU member states.

Following a contractionary monetary policy shock, the aggregate output decreases over time for six to eight quarters, while the real interest rate increases immediately and remains high for three quarters, which can hardly be replicated by models characterized by a standard consumption Euler equation. This paper adopts a segmented markets framework where some households are permanently excluded from financial markets. The aggregate output and the nominal interest rate are modeled as exogenous autoregressive processes, while the real interest rate is determined endogenously. For intermediate levels of market segmentation, the model is able to account for both the persistent decreasing path of the aggregate output and the persistent increase in the real interest rate which follow an unanticipated increase in the nominal interest rate. The sign, the size and the persistence of the responses of the real interest rate and the money growth rate are close to those in the data.