Under the same (Chole)sky: DNK models, timing restrictions and recursive identification of monetary policy shocks

Angelini, Giovanni ; Sorge, Marco Maria (2021) Under the same (Chole)sky: DNK models, timing restrictions and recursive identification of monetary policy shocks. Bologna: Dipartimento di Scienze economiche, p. 38. DOI 10.6092/unibo/amsacta/6646. In: Quaderni - Working Paper DSE (1160). ISSN 2282-6483.
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Abstract

Recent structural VAR studies of the monetary transmission mechanism have voiced concerns about the use of recursive identification schemes based on short-run exclusion restrictions. We trace out the effects on impulse propagation of informational constraints embodying classical Cholesky-timing restrictions in otherwise standard Dynamic New Keynesian (DNK) models. By reinforcing internal propagation mechanisms and enlarging a model's equilibrium state space, timing restrictions may produce a non-trivial moving average component of the equilibrium representation, making finite order VARs a poor approximation of true adjustment paths to monetary impulses, albeit correctly identified. They can even serve as an independent source of model-based nonfundamentalness, thereby hampering shock identification via VAR methods. This notwithstanding, restricted DNK models are shown to feature (i) invertible equilibrium representations for the observables and (ii) fast-converging VAR coefficient matrices under empirically tenable parameterizations. This alleviates concerns about identification and lag truncation bias: low-order Cholesky-VARs do well at uncovering the transmission of monetary impulses in a truly Cholesky world.

Abstract
Tipologia del documento
Monografia (Working paper)
Autori
AutoreAffiliazioneORCID
Angelini, GiovanniUniversity of Bologna0000-0003-3000-9885
Sorge, Marco MariaUniversity of Salerno
Parole chiave
DSGE models Timing restrictions Vector autoregression Cholesky identification
Settori scientifico-disciplinari
ISSN
2282-6483
DOI
Data di deposito
07 Apr 2021 14:32
Ultima modifica
15 Apr 2021 13:25
URI

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