Estimating the effects of monetary shocks: An evaluation of different approaches

This paper compares several methods for estimating the effects of monetary innovations on key macroeconomic variables and, subsequently, clarifies issues related to the use of instrumental variables in the identification of structural impulse responses. In particular, we make explicit the property that a measure of monetary policy must satisfy in order to identify the effects of monetary shocks. Within our framework we find that none of the currently popular methods of identifying the effects of monetary shocks are supported by the data. We also indicate how current approaches can be combined to provide unbiased estimates of the effects of monetary disturbances. ( 1998 Elsevier Science B.V. All rights reserved. JEL classification: E52