Monetary policy shock

[Ecofai]

Hi

My IRFs show that a positive monetary policy shock lowers the interest rate, Is it normal ? If yes, what is the economic intuition behind ?

Thnx

[jpfeifer]

Yes, that can happen. See

Positive monetary policy shock with nominal interest rate falling?

All I am saying is that it could be a feature and not a bug. I did not check your model. The mechanism is the following: Assume the initial monetary policy shock increases the nominal and thus the real interest rate. The central bank then reacts to lower output and inflation endogenously by lowering the nominal interest rate. If the response is strong enough, it overcompensates the initial increase due to the shock. The only thing you know is that the real interest rate increases, so that the s…

[Ecofai]

I see your point,

Which of this two cases is correct ?

Case 1 :

I supposed that the monetary policy shock follow AR(1), e_R = rho_R*e_R(-1)+eta_R ; eta_R i.i.d
and the monetary policy rule is a simple TR

Case 2 :
I supposed that the persistence of interest rate shock is already captured by the rho*r(-1) in the Taylor rule. And I changed the AR(1) by e_R=eta_R, I got the following IRFs for the monetary policy shock

[jpfeifer]

There is no right or wrong here. The correct specification depends on your view on how the world works.

[DrShults]

It depends on sensitivity of p to y (usually kappa). I also met this problem and found that when kappa is small (less 0.25 in my model), positive monetary shock lowers the interesr rate. And vice versa.

[jpfeifer]

You can see in Gali’s textbook that the sign of the response depends on various parameters.

[aibenaimer1]

jpfeifer，I had the same problem that a positive monetary policy shock lowers the interest rate.
I want to ask where I can find ‘Gali’s textbook’？I want to know which parameters are affecting the response.
I also found when the response coefficient of output in Taylor Rule (kappa_y) is big , interesr rate rise, when kappa_y is small , interesr rate decline. However, because the response coefficient of output is less than 0.5 in most articles，I’m not sure whether the large response coefficient of output is correct? For example when kappa_y is greater than 0.8，even greater than 1.

[jpfeifer]

You should google it. See https://press.princeton.edu/titles/10495.html

[aibenaimer1]

jpfeifer，I have read the book you said. I’m sorry I didn’t find an answer to the question I met.
kappa_y in ‘Monetary Policy, Inflation, and the Business Cycle’ is set to 0.125. I’m really puzzled.
I would like to ask the following questions：
I found when the response coefficient of output in Taylor Rule (kappa_y) is big , interesr rate rise, when kappa_y is small , interest rate decline. However, because the response coefficient of output is less than 0.5 in most articles，I’m not sure whether the large response coefficient of output is correct? For example when kappa_y is greater than 0.8，even greater than 1.

[jpfeifer]

The relevant expression is on page 51 of the 2008 edition of the book.
And yes, a very strong output feedback is quite unusual.

[aibenaimer1]

jpfeifer，my estimated results of kappa_y is equal to 0.9342， I’m not sure whether the result is correct？
In a very few articles，I see that kappa_y are set to be greater than 1. I’m really confused. Could you tell me how much kappa_y equals in general is appropriate? What problems lead to higher kappa_y values?
Thank you in advance.

[jpfeifer]

This is nothing you can generalize. Most results you see in the data are for the US or Europe (since 1980 or so). Other countries and time periods may be different.