Uncertainty-dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation

Efrem Castelnuovo and Giovanni Pellegrino

Melbourne Institute Working Paper Series from Melbourne Institute of Applied Economic and Social Research, The University of Melbourne

Abstract: We estimate a nonlinear VAR model to study the real effects of monetary policy shocks in regimes characterized by high vs.low macroeconomic uncertainty. We find unexpected monetary policy moves to exert a substantially milder impact in presence of high uncertainty. We then exploit the set of impulse responses coming from the nonlinear VAR framework to estimate a medium-scale new-Keynesian DSGE model with a minimum-distance approach. The DSGE model is shown to be able to replicate the VAR evidence in both regimes thanks to different estimates of some crucial structural parameters. In particular, we identify a steeper new-Keynesian Phillips curve as the key factor behind the DSGE models ability to replicate the milder macroeconomic responses to a monetary policy shock estimated with our VAR in presence of high uncertainty. A version of the model featuring firm-specific capital is shown to be associated to estimates of the price frequency which are in line with some recent evidence based on micro data.

Keywords: Monetary policy shocks; uncertainty; Threshold VAR; medium scale DSGE framework; minimum-distance estimation. (search for similar items in EconPapers)
JEL-codes: C22 E32 E52 (search for similar items in EconPapers)
Pages: 57pp
Date: 2018-03
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Related works:
Journal Article: Uncertainty-dependent effects of monetary policy shocks: A new-Keynesian interpretation (2018)
Working Paper: Uncertainty-dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation (2018)
Working Paper: Uncertainty-dependent Effects of Monetary Policy Shocks: A New Keynesian Interpretation (2017)
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