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Volume 4, Issue 2

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Monetary Policy Transmission in Italy: A BVAR Analysis with Sign Restriction

Migliardo, Carlo

Year: 2010   Volume: 4   Issue: 2   Pages: 139-167

Abstract: In this paper, we propose a Bayesian VAR model to examine the short term effects of monetary policy shocks on the Italian economy. Firstly, our BVAR model uses the Cholesky decomposition to identify four kinds of macroeconomic shocks, namely, supply, demand, interest rate and monetary shocks. Then, from the theoretical model, we derive and impose a minimum set of robust sign restrictions to identify the transmission mechanism of monetary tightening. The outcomes from the sign identification confirm the micro evidence on inflation persistence. Moreover, our results show a greater persistence of inflation to monetary restriction than Cholesky identification presents. Overall, we find that a monetary innovation brings a decline of 30 basis point of GDP, this result is almost invariant across both prior and identification technique.

JEL classification: C11, C32, E12, E32, E58

Keywords: Bayesian VAR methods, conjugate prior, Litterman prior, Markov chain Monte Carlo, monetary policy, regime switching, sign restriction identification

RePEc: http://ideas.repec.org/a/fau/aucocz/au2010_139.html

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