No. 267 Using Financial Markets To Estimate the Macro Effects of Monetary Policy: An Impact-Identified FAVAR*

By Stefan Pitschner

May 2013 

Abstract

In this paper, I use high-frequency financial market estimates to identify the monetary policy shock in a non-recursive 133 variable FAVAR. All restrictions are imposed exclusively on impact, and only on financial market variables. Using the economy's underlying factor structure as the link between its real and financial sides, I find that high-frequency responses contain valuable information about the behavior of lower-frequency macro variables. Even though the proposed identification scheme does not fall back on any of the standard (FA) VAR identifying assumptions, it confirms the classical finding that monetary policy has strong and significant delayed effects on real activity. I also obtain stock market responses that are compatible with the efficient market hypothesis and find that consumer prices react very little to monetary policy. 

Keywords:

Monetary Policy, Impact Identification, FAVAR, Financial Markets, Efficient Market Hypothesis

JEL classification:

E52, E58, E44.