hero working papers

The Econometrics of Monetary Policy: an Overview

Number: 329
Year: 2007
Author(s): Carlo A. Favero
This chapter concentrates on the Econometrics of Monetary Policy. We describe
the evolution of models estimated to evaluate the macroeconomic impact of the
effect of monetary policy . We argue that the main challenge for the
econometrics of monetary policy is the combination of theoretical models and
information from the data to construct empirical models. The failure of the
large econometrics models at the beginning of the 1970s might be explained by
their incapability of taking proper account of both these aspects. The great
critiques by Lucas and Sims have generated an alternative approach which, at
least initially, has been almost entirely dominated by theory. The LSE
approach has instead concentrated on the properties of the statistical models
and on the best way of incorporating information from the data into the
empirical models, paying little attention to the economic foundation of the
adopted specification. The realization that the solution of a DSGE model can
be approximated by a restricted VAR, which is also a statistical model, has
generated a potential link between the two approaches. The open question is
which type of VARs are most appropriate for the econometric analysis of
monetary policy.

Keywords: Econometrics, Monetary Policy, identification, DSGE, VAR, FAVAR
JEL codes: C10, C52, E50