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Giovanni Ricco, Warwick University Print
Thursday, 20 October 2016, 12:15 - 13:15

Giovanni Ricco, Warwick University

The Transmission of Monetary Policy Shocks

Abstract: Despite fifty years of empirical research, there is still a lot of uncertainty around the effects of monetary policy. Not just the magnitude and the significance, but even the sign of the responses of prices and output is controversial. This paper delivers new insights on both (i) the identification of the shocks, building on intuitions provided by models of asymmetric and imperfect information, and (ii) on the econometric framework, by using a novel, flexible linear model that optimally bridges between standard (Bayesian) Vector Autoregressions and the Local Projection approach. We name this new method Bayesian Local Projection (BLP).We find robust and ‘unpuzzling’ results. Following a monetary tightening, economic activity and prices contract, with no evidence of a price puzzle, lending to consumers and businesses cools down, and expectations move in line with fundamentals. Moreover, the currency appreciates, and equity prices fall. Finally, the slope of the yield curve flattens, borrowing costs rise and so do corporate spreads.The Transmission of Monetary Policy Shocks 

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