Effects of idiosyncratic shocks on macroeconomic time series

2013

This research was aimed to find out the relationship between unemployment, inflation and economic growth of Pakistan. The data was collected for 31 years from 1980-2010. The results showed that there is two-way granger causality exist between these economic variables. These variables have more variance contribution of themselves as compare to other variables in system. Inflation rate has contributed to unemployment variance more as compare to economic growth , unemployment contribute more to economic growth as compared to inflation an d unemployment rate has also more variance contribution to inflation as compare to economic growth. Unemployment rate has more variance contribution in both inflation and economic growth rate.

2010

This paper estimates a DSGE model featuring macro-…nance interactions with U.S. data. Our structural model predicts a negative and signi…cant reaction of the …nancial conditions to an unexpected monetary policy tightening. However, a MonteCarlo exercise reveals that such reaction is overlooked by VARs in which the monetary policy shock is identi…ed via the commonly employed Cholesky (zero) restrictions. The impulse responses of the Cholesky-VARs in our controlled exercise replicate, to a large extent, those obtained with actual U.S. data.

Journal of Risk and Financial Management, 2021

We use a dynamic factor model to provide a semi-structural representation for 101 quarterly US macroeconomic series. We find that (i) the US economy is well described by a number of structural shocks between two and five. Focusing on the four-shock specification, we identify, using sign restrictions, two policy shocks, monetary and fiscal, and two non-policy shocks, demand and supply. We obtain the following results. (ii) Both supply and demand shocks are important sources of fluctuations; supply prevails for GDP, while demand prevails for employment and inflation. (ii) Monetary and fiscal policy shocks have sizable effects on output and prices, with no evidence of crowding-out of private aggregate demand components; both monetary and fiscal authorities implement important systematic countercyclical policies reacting to demand shocks. (iii) Negative demand shocks have a large long-run positive effect on productivity, consistently with the Schumpeterian “cleansing” view of recessions.

International Journal of Economics and Finance, 2021

This paper revisits the main assumption regarding the original Phillips curve regarding the American economy, in which one assumes that the unemployment rate causes an inflation rate. In this context, this paper aims to evaluate if the variance of the inflation rate affects the unemployment rate and, besides, if there is a one-way causality from the variance of the inflation rate to the unemployment rate. Based on quarterly time series from 1959:04 to 2019:04 the empirical results show, via OLS and GMM methods, that the monetary policy affects the business cycle, and, in turn, the business cycle impacts the unemployment rate. Hence, the monetary policy affects indirectly the unemployment rate via the business cycle. On the other hand, the variance of the inflation rate contributes to an increase in the unemployment rate, consequently, there isn’t a trade-off between the unemployment rate and the variance of the inflation rate. Moreover, there is a one-way causality from the variance...

Mathematics

The Federal Reserve has played an arguably important role in financial crises in the United States since its creation in 1913 through monetary policy tools. Thus, this paper aims to analyze the impact of monetary policy on the United States’ economic growth in the short and long run, measured by Gross Domestic Product (GDP). The Vector Autoregressive (VAR) method explores the relationship among the variables, and the Granger causality test assesses the predictability of the variables. Moreover, the Impulse Response Function (IRF) examines the behavior of one variable after a change in another, utilizing the time-series dataset from the first quarter of 1959 to the second quarter of 2022. This work demonstrates that expansionary monetary policy does have a positive impact on economic growth in the short term though it does not last long. However, in the long term, inflation, measured by the Consumer Price Index (CPI), is affected by expansionary monetary policy. Therefore, if the Fed...

Cholesky-VAR impulse responses estimated with post-1984 U.S. data predict modest macroeconomic reactions to monetary policy shocks. We interpret this evidence by employing an estimated medium-scale DSGE model of the business cycle as a Data-Generating Process in a Monte Carlo exercise in which a Cholesky-VAR econometrician is asked to estimate the effects of an unexpected, temporary increase in the policy rate. Our structural DSGE model predicts conventional macroeconomic reactions to a policy shock. In contrast, our Monte Carlo VAR results replicate our evidence obtained with actual U.S. data. Hence, modest macroeconomic effects may very well be an artifact of Cholesky-VARs. A combination of supply and demand shocks may be behind the inability of Cholesky-VARs to replicate the actual macroeconomic responses. The difference in the VAR responses obtained with Great Inflation vs. Great Moderation data may be due to instabilities in the parameters related to households' and firms' programs, more than to a more aggressive systematic monetary policy. A Monte Carlo assessment of sign restrictions as an alternative identification strategy is also proposed.

Economics Letters, 1998

A simple procedure to identify the groups of permanent and transitory shocks in a cointegrated VAR model is suggested and a method for inverting the cointegrated VAR is provided.

Journal of Monetary Economics, 2005

This paper proposes to estimate the effects of monetary policy shocks by a new "agnostic" method, imposing sign restrictions on the impulse responses of prices, nonborrowed reserves and the federal funds rate in response to a monetary policy shock. No restrictions are imposed on the response of real GDP to answer the key question in the title. We find that "contractionary" monetary policy shocks have an ambiguous effect on real GDP. Otherwise, the results found in the empirical VAR literature so far are largely confirmed. The results could be paraphrased as a new Keynesian-new classical synthesis: even though the general price level is sticky for a period of about a year, money may well be close to neutral. We provide a counterfactual analysis of the early 80's, setting the monetary policy shocks to zero after December 1979, and recalculating the data. We found that the differences between observed real GDP and counterfactually calculated real GDP was not very large. Thus, the label "Volcker-recession" for the two recessions in the early 80's appears to be misplaced.

Center For Economic Research, 2008

We use the structural factor model proposed by Forni, Giannone, Lippi and Reichlin (2007) to study the effects of monetary policy. The advantage with respect to the traditional vector autoregression model is that we can exploit information from a large data set, made up of 112 US monthly macroeconomic series. Monetary policy shocks are identified using a standard recursive scheme, in which the impact effects on both industrial production and prices are zero. Such a scheme, when applied to a VAR including a suitable selection of our variables, produces puzzling results. Our main findings are the following. (i) The maximal effect on bilateral real exchange rates is observed on impact, so that the "delayed overshooting" or "forward discount" puzzle disappears. (ii) After a contractionary shock prices fall at all horizons, so that the price puzzle is not there. (iii) Monetary policy has a sizable effect on both real and nominal variables. Such results suggest that the structural factor model is a promising tool for applied macroeconomics.

International Finance Discussion Paper

This paper considersan alternativeeconometricapproach to the VAR methodologyfor identifyingand estimatingthe effects of monetary policy shocks. The alternativeapproach incorporates availablemeasuresof market participants'expectationsof economicvariables in order to calculateeconomicinnovationsto those variables. In general, expectationsmeasures should provide important additionalinformationrelative to a standard VAR analysis, since market participants presumably use a much richer informationset than that assumed in a typical VAR model. The resulting innovationsare easily incorporatedin a VAR-like fimework. The empirical results are quite surprising. First, when expectationsare incorporated,the variance of all innovationsis reduced substantially. Second, innovationsto the federal funds rate derived using the alternativeapproach are only somewhatcorrelatedwith their VAR counterparts, while innovationsto other economicvariables are essentiallyuncorrelated. Still, monetary policy shoch derived using the two approachesare a(so somewhatcorrelated, since innovationsto prices and economic activity explainonly a small fraction of innovationsto the fderal funds rate. As a consequence,the impulseresponsesof economicvariables to the two sets of monetary policy shocks have remarkably similar properties. Using Measures of Expectations to Identi& the Effects of a Monetary Policy Shock Allan D. Brunnerl I. Introduction Vectorautoregressive (VAR) models, popularizedby Sims (1980), have been used widely and extensivelyby economiststo study the dynamic behaviorof economicvariables. The appeal of VAR models is likely due to severalattractivefeatures relative to other econometric modeling approaches. These features include a minimum number of identi~ing restrictions, few exogenousvariables,and an ease of implementation. Still, the use of a VAR model requires a few strong assumptionsabout the availabilityof informationto economicagents, some of which are also common to other moreoveridentifiedeconometricmodels. This paper considersan alternativeapproach that address some possible shoticomingsof the VAR approach,while maintainingmany of its appealing features. The estimationof a structuralVAR m~el generally requires two steps. First, a vector of economic variables,~, is regressed on several lags of itself. The set of lagged variables (dated t-1 and earlier) is assumed to be a good proxy for the information set that is available to economic agents just prior to the determination of Xt. As a consequence, VAR residuals are interpreted as economic innovations, new informationabout Xt that becomesavailableat time t. In the second step of estimation, the innovationsare decomposedinto orthogonalshoch using one of several methods. These shocks are ofien given a structuralor behavioralinterpretation. This paper is concernedprimarily with two implicit assumptionsthat are made in the first step 1 The author is an economistin the InternationalFinance Division, Board of Governors of the Federal Reserve System. The author would like to thank Neil Ericsson, Bill Helkie, Dale Henderson, and workshop participantsat the Board of Governorsfor usefil commentson earlier versions of this paper. He is also grateful to Larry Christian, Charlie Evans, Christian Gilles, Vincent Reinha.rt,and Glenn Rudebuschfor helpfil discussionsand to AthanasiosOrphanidesand James Walsh for providing the MMS data. This paper representsthe views of the author and should not be interpretedas reflecting the views of the Board of Governorsof the Federal Reserve System or other member of its staff. The author is responsiblefor any errors.

DergiPark (Istanbul University), 2015

The main point of this study is to analyse the relationship between unemployment and inflation in Turkey. The study investigation period is the years between 1988 and 2002. Vector Autoregressive Model (VAR) and impulseresponse analysis are used in the study to explain the relationship. According to the results, there is a negative way relationship between unemployment and inflation. This result is a supportive of Philips curve. This conclusion is important for stating an optimal inflation target and therefore obtaining a natural unemployment rate.

2007

This paper investigates changes in monetary policy and the possibility of linkages with recent changes in the US economy towards increased stability. We propose a nonparametric tool to investigate local parameters and dynamic impulse response functions in a monetary VAR system. The advantage of this tool is that it allows recursive real time analysis of the local average effects of a shock to any given variable in the VAR system. In addition, the framework is very flexible as all model parameters are time varying at any point in time. This allows examination of complex dynamics such as nonlinearities, nonstationarities, and asymmetric behavior over time and across business cycle phases without a need to specify a functional form for the density function. The method is applied to real time unrevised data on inflation, nominal interest rates, and output in the U.S. The results suggest that there have been abrupt as well as gradual changes in the systematic part of the VAR, in the variances of the shocks, and in the monetary transmission mechanism. We find that the Fed's response to inflation and real activity, and the economy's response to monetary policy are highly nonlinear before 1980 and much more stable afterwards. In addition, we find that although changes in monetary policy are important to explain the smaller impact of shocks to output and inflation, changes in the propagation and transmission mechanisms may have been the source of increased stability.

2013

Economic Modelling, 1996

The main purpose of this paper is to discern the dynamic causal chain (in the Granger (temporal) sense rather than in the structural sense) among real output, money, interest rate, inflation and the exchange rate in the context of a small Asian developing economy, such as Indonesia. The methodology employed uses various unit root tests and Johansen's cointegration test followed by vector error-correction modelling, variance decompositions, and impulse response functions in order to capture both the within-sample and out-of-sample Granger causal chain among macroeconomic activity. Given the inward-oriented growth strategy of this small developing economy, where the real output was vulnerable to vicissitudes of the agricultural sector and exports (particularly oil), our results are quite in line with our expectations, and tend to suggest that in the Granger-causality sense, output was relatively the leading variable being the most exogenous of all, and all other variables including money supply, rate of interest, exchange rate, and prices had to bear the brunt of adjustment endogenously in different proportions in order to accommodate that real shock. The Granger-causal chain implied by our evidence that real output more often predominantly leads (rather than lags) money supply and the other three endogenous variables, is consistent more with the recent real business cycle (RBC) theory than with the other two major macroeconomic paradigms such as the Keynesian and the monetarist. This finding has clear policy implications for any accommodative and/or excessive monetary expansion since it is likely to be dissipated in terms of relatively higher nominal variables, such as prices, exchange rates or interest rates rather than real output, for a small developing economy like Indonesia in the context of a relatively unstable macroeconomic environment. 0264-9993/96/$15.00