Estimating the Effects of Monetary Policy in Australia Using Sign-restricted Structural Vector Autoregressions

Abstract

Existing estimates of the macroeconomic effects of Australian monetary policy tend to be based on strong, potentially contentious, assumptions. I estimate these effects under weaker assumptions. Specifically, I estimate a structural vector autoregression identified using a variety of sign restrictions, including restrictions on impulse responses to a monetary policy shock, the monetary policy reaction function, and the relationship between the monetary policy shock and a proxy for this shock. I use an approach to Bayesian inference that accounts for the problem of posterior sensitivity to the choice of prior that arises in this setting, which turns out to be important. Some sets of identifying restrictions are not particularly informative about the effects of monetary policy. However, combining the restrictions allows us to draw some useful inferences. There is robust evidence that an increase in the cash rate lowers output and consumer prices at horizons beyond a year or so. The results are consistent with the macroeconomic effects of a 100 basis point increase in the cash rate lying towards the upper end of the range of existing estimates.

Can we Use High‐Frequency Data to Better Understand the Effects of Monetary Policy and its Communication? Yes and No!*

“…Numerous papers have applied these approaches to Australian data (e.g. Berkelmans, 2005;Beechey & Österholm, 2008;Jääskelä & Jennings, 2010;Jääskelä & Smith, 2011;Read 2022). A common finding in the Australian literature is that, while increases in interest rates tend to be contractionary for the economy, they also tend to be associated with increases in inflation: the so-called price puzzle.…”

Can We Use High-frequency Yield Data to Better Understand the Effects of Monetary Policy and Its Communication? Yes and No!

“…Numerous papers have applied these approaches to Australian data (e.g. Berkelmens 2005; Beechey and Österholm 2008;Lawson and Rees 2008;Jääskelä and Jennings 2010;Jääskelä and Smith 2011;Read 2022). A common finding in the Australian literature is that while increases in interest rates tend to be contractionary for the economy, they also tend to be associated with increases in inflation: the so-called 'price puzzle'.…”