Do SVARs with sign restrictions not identify unconventional monetary policy shocks?

Focus

A growing empirical literature has shown, based on structural vector autoregressions (SVARs) identified through sign restrictions, that unconventional monetary policies implemented after the outbreak of the Great Financial Crisis had expansionary macroeconomic effects. A recent paper suggests, however, that these studies fail to identify true unconventional monetary policy shocks, thus casting doubt on the positive macroeconomic effects of these policies.

Contribution

The paper revisits the approach recently used to evaluate identification schemes designed to identify unconventional monetary policy shocks. In this way, the paper contributes to the ongoing debate about whether unconventional monetary policy had significant positive macroeconomic effects.   

Findings

We show that the findings of a recent study challenging sign restrictions-based SVARs are actually fully consistent with a successful identification of unconventional monetary policy shocks by the earlier studies, and that the approach used does not serve the purpose of evaluating identification strategies of SVARs.

Abstract

A growing empirical literature has shown, based on structural vector autoregressions (SVARs) identified through sign restrictions, that unconventional monetary policies implemented after the outbreak of the Great Financial Crisis (GFC) had expansionary macroeconomic effects. In a recent paper, Elbourne and Ji (2019) conclude that these studies fail to identify true unconventional monetary policy shocks in the euro area. In this note, we show that their findings are actually fully consistent with a successful identification of unconventional monetary policy shocks by the earlier studies and that their approach does not serve the purpose of evaluating identification strategies of SVARs.

JEL classification: C32, E52

Keywords:  unconventional monetary policy, SVARs, shock identification