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

Dario Caldara; Edward Herbst

doi:10.1257/mac.20170294

journal article Jan 01, 2019

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

Dario Caldara Edward Herbst

American Economic Journal: Macroeconomics Vol. 11 No. 1 pp. 157-192 · American Economic Association

View at Publisher Save 10.1257/mac.20170294

Abstract

In this paper, we develop a Bayesian framework to estimate a proxy structural vector autoregression to identify monetary policy shocks. We find that during the Great Moderation period, monetary policy shocks induce a persistent decline in real activity and tightening in financial conditions. Central to this result is a systematic component of monetary policy characterized by a direct and economically significant reaction to changes in corporate credit spreads. The failure to account for this endogenous reaction induces an attenuation in the response of all variables to monetary shocks, a result that also applies to the narrative identification of Romer and Romer (2004). (JEL C32, E23, E32, E44, E52, E58)

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Metrics

104

Citations

38

References

Details

Published: Jan 01, 2019
Vol/Issue: 11(1)
Pages: 157-192

Authors

D

Dario Caldara

Federal Reserve Board, 20th Street and Constitution Avenue NW, Washington, DC 20551 (email: )

E

Edward Herbst

Federal Reserve Board, 20th Street and Constitution Avenue NW, Washington, DC 20551 (email: )

Cite This Article

Dario Caldara, Edward Herbst (2019). Monetary Policy, Real Activity, and Credit Spreads: Evidence from Bayesian Proxy SVARs. American Economic Journal: Macroeconomics, 11(1), 157-192. https://doi.org/10.1257/mac.20170294

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

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