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Identifying Monetary Policy Shocks Through External Constraints

Lookup NU author(s): Dr Francesco FusariORCiD

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Abstract

This paper proposes a new strategy for the identification of monetary policy shocks in structural vector autoregressions (SVARs). It combines sign restrictions on the impulse responses with external constraints on high-frequency surprises and central bank’s macroeconomic projections. I use this approach to evaluate the transmission of US monetary policy over the period 1965–2007. First, I find that contractionary monetary policy shocks unequivocally decrease output, sharpening the ambiguous implications of standard sign-restricted SVARs. Second, I show that these findings, differently from those obtained under alternative methodologies, remain valid even when inference is performed using a prior-robust Bayesian algorithm. Furthermore, my identification strategy is successful in recovering monetary shocks and monetary policy equations that are coherent, respectively, with narrative sign restrictions and restrictions on the systematic component of monetary policy. Finally, I show that this framework ensures great flexibility and is particularly convenient for the joint identification of monetary policy and central bank information shocks.

Publication metadata

Author(s): Fusari F

Publication type: Article

Publication status: Published

Journal: Journal of Macroeconomics

Year: 2025

Volume: 85

Print publication date: 01/09/2025

Online publication date: 11/07/2025

Acceptance date: 18/06/2025

Date deposited: 28/07/2026

ISSN (print): 0164-0704

ISSN (electronic): 1873-152X

Publisher: Elsevier

URL: https://doi.org/10.1016/j.jmacro.2025.103696

DOI: 10.1016/j.jmacro.2025.103696

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