February 19, 2019

Do zero and sign restricted SVARs identify unconventional monetary policy shocks in the euro area?

This research re-examines the findings of the existing literature on the effects of unconventional monetary policy. It concludes that the existing estimates based on vector autoregressions in combination with zero and sign restrictions do not successfully isolate unconventional monetary policy shocks from other shocks impacting the euro area economy. In our research, we show that altering existing published studies by making the incorrect assumption that expansionary monetary shocks shrink the ECB’s balance sheet or even ignoring all information about the stance of monetary policy results in the same shocks and, therefore, the same estimated responses of output and prices.
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As a consequence, it is implausible that the shocks previously identified in the literature are true unconventional monetary policy shocks. Since correctly isolating unconventional monetary policy shocks is a prerequisite for subsequently estimating the effects of unconventional monetary policy shocks, the conclusions from previous vector autoregression models are unwarranted. We show this lack of identification for different specifications of the vector autoregression models and different sample periods.

To overcome this identification problem our research uses an alternative technique for isolating unexpected changes in monetary policy based on futures rate data. Using data on monetary surprises from Jarociński and Karadi (2018) and this alternative technique we do not find statistically significant evidence that unconventional monetary policy shocks have affected economic activity and only very weak evidence for an effect on prices.

In an earlier CPB Discussion Paper 371 'The effects of unconventional monetary policy in the euro area', we concluded that expansionary unconventional monetary policy shocks had stimulated economic activity in the euro area, although the estimates were only weakly significant. This was based on a vector autoregressive regression with zero and sign restrictions - a well-accepted methodology in the literature. However, the new Discussion Paper shows that, like the other results reported in the literature using vector autoregressions, our previous results are not reliable. Other methods are required to analyse the causal effect of unconventional monetary policy on the economy. 

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