Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/302164 
Year of Publication: 
2024
Series/Report no.: 
IRENE Working Paper No. 24-03
Publisher: 
University of Neuchâtel, Institute of Economic Research (IRENE), Neuchâtel
Abstract: 
We propose a two-step approach to estimate multi-dimensional monetary policy shocks and their causal effects requiring only daily financial market data and policy events. First, we combine a heteroscedasticity-based identification scheme with recursive zero restrictions along the term structure of interest rates to disentangle multi-dimensional monetary policy shocks and derive an instrumental variables estimator to estimate dynamic causal effects. Second, we propose to use the Kalman filter to compute the linear minimum mean-square-error prediction of the unobserved monetary policy shocks. We apply the approach to examine the causal effects of US monetary policy on the exchange rate. The heteroscedasticity-based monetary policy shocks display a relevant correlation with existing high-frequency surprises. In addition, their dynamic causal effects on the exchange rate are similar. This suggests the approach is a valid alternative if high-frequency identification schemes are not applicable.
Subjects: 
Monetary policy shocks
forward guidance
large-scale asset purchases
identification through heteroscedasticity
instrumental variables
term structure of interest rates
exchange rate
JEL: 
C3
E3
E4
E5
F3
Document Type: 
Working Paper

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