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November 23, 2016

Seminar

Monetary Policy, Real activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs

Date

November 23, 2016

Location

Gustav-Schmoller-Raum
DIW Berlin im Quartier 110
Room 3.3.002A
Mohrenstraße 58
10117 Berlin

Speaker

Dario Caldara, Federal Reserve

This paper studies the interaction between monetary policy, financial markets, and the real economy. We develop a Bayesian framework to estimate proxy structural vector autoregressions (SVARs) in which monetary policy shocks are identified by exploiting the information contained in high frequency data. For the Great Moderation period, we find that monetary policy shocks are key drivers of  uctuations in industrial output and corporate credit spreads, explaining about 20 percent of the volatility of these variables. Central to this result is a systematic component of monetary policy characterized by a direct and economically significant reaction to changes in credit spreads. We show that the failure to account for this endogenous reaction induces an attenuation bias in the response of all variables to monetary shocks.

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