A Two Steps Procedure: Taylor Rule Identification of the Monetary policy Shock

INSTRUCTIONS TO CANDIDATES

ANSWER ALL QUESTIONS

Monetary Policy and Unemployment

Data Transformations:

1) Policy rate (is in rates, no transformation, r(t))

2) CPI (inflation pi(t)=100*log(CPI)-100* log(CPI(-4))

3) Real GDP (output gap, ygap(t)=100*ln(GDP)-hpfilter(100*ln(GDP)), where hpfilter is the Hodrick-Prescott filter in Eviews

4) Unemployment (is in rates, no transformation, u(t))

5) Vacancies (u(t)=Dv(t)=100*ln(Vacancies)-100*ln(Vacancies(-4))

6) Real Wages (u(t)=Dw(t)=100*ln(Real Wages)-100*ln(Real Wages(-4))

7) Average hours (u(t)=DlabProd(t)=100*ln(GDP/Hours)-100*(GDP(-4)/Hours(-4))

 

A Two Steps Procedure: Taylor Rule

Identification of the Monetary policy Shock

This is going to be a two steps regression exercise. In the first step a Taylor Rule reaction function is going to be estimated.

r(t)=constant+gammaPi*pi(t)+gammaY*ygap(t)+mp(t)

From this step the monetary policy shock (mp(t)) is going to be identified. In the second step, the monetary policy shock is regressed on a number of labour market variables say

u(t)=constant+rho*u(t-1)+beta*mp(t)+v(t)

 

Dv (t)=constant+rho* Dv (t-1)+beta*mp(t)+v(t)

 

Dw (t)=constant+rho* Dw (t-1)+beta*mp(t)+v(t)

 

DlabProd (t)=constant+rho* DlabProd (t-1)+beta*mp(t)+v(t)

 The effect of monetary policy on labour market quantities is given by beta/(1-rho)

One Step Procedure: VAR

Alternatively, you can estimate a VAR model where all variables are used. The variables must be ordered as follows

 

1) GDP

2) CPI

3) Unemployment

4) Wages

5) Labour productivity

6) Policy rate

The shock is identified via Cholesky

 

Alternatively, you could try:

1) Monetary policy shock (mp(t) from the previous section)

2) GDP

3) CPI

4) Unemployment

5) Wages

6) Labour productivity

 

The shock is identified via Cholesky

Attachments:

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