Federal Reserve Bank of Richmond
Gaussian Mixture Approximations of Impulse Responses and the Nonlinear Effects of Monetary Shocks
This paper proposes a new method to estimate the (possibly nonlinear) dynamic effects of structural shocks by using Gaussian basis functions to parametrize impulse response functions. We apply our approach to the study of monetary policy and obtain two main results. First, regardless of whether we identify monetary shocks from (i) a timing restriction, (ii) sign restrictions, or (iii) a narrative approach, the effects of monetary policy are highly asymmetric: A contractionary shock has a strong adverse effect on unemployment, but an expansionary shock has little effect. Second, an expansionary shock may have some expansionary effect, but only when the labor market has some slack. In a tight labor market, an expansionary shock generates a burst of inflation and no significant change in unemployment.
Cite this item
Regis Barnichon & Christian Matthes, Gaussian Mixture Approximations of Impulse Responses and the Nonlinear Effects of Monetary Shocks, Federal Reserve Bank of Richmond, Working Paper 16-8, 01 Mar 2014, revised 01 Jun 2016.
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
- C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This item with handle RePEc:fip:fedrwp:16-08
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