← Research Replication

Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy

How do output, prices and wages respond to a monetary policy shock? Section II of the paper estimates the responses that its DSGE model is then built to match.

Lawrence J. Christiano, Martin Eichenbaum and Charles L. Evans, Journal of Political Economy 113(1), 2005

Replication by Isabella Bonetto, Irene Ferraioli, Lorenzo Giordani, Alessio Morrone and Tiziano Nocco.

VAR Cholesky identification Bootstrap Monetary policy
Code → The paper →
Impulse responses 
 
 
 
 
 
 
 
 
 
 
What we did
 
     
  1. Data and VAR
    Nine U.S. aggregates from FRED, 1965Q3–1995Q3, in a VAR(4) in levels estimated by OLS.
    2.  
  2. Identification
    The paper’s timing assumption: output, consumption, prices, investment, wages and productivity do not respond to the policy shock within the quarter.
    3.  
  3. Responses
    Impulse responses with 68% and 95% bootstrap bands, the variance decomposition, and a point-by-point comparison with the paper’s Figure 1 and Table 1.
    4.  
  4. Robustness
    Commodity prices in the Fed’s information set, and VARs with 2, 4 and 6 lags.
    5.  
 
 
 
What we found
 
A short-lived cut in the funds rate produces a delayed, hump-shaped and persistent rise in real activity, while inflation responds only slowly.
 
 
+0.54%
Peak of GDP six quarters after an expansionary shock (paper: +0.5% after five); the funds rate is back to baseline after about six quarters.
 
−0.26 → −0.12
Initial dip in inflation, the price puzzle, without and with commodity prices; the paper has −0.12.
 
36% / 38%
Share of the variance of GDP explained by policy shocks at two years, ours and the paper’s.
 
 
Inflation turns positive after about a year and a half and peaks after three years (+0.15 points, paper +0.2). The results hold with 2 and 6 lags, and with commodity prices the price puzzle shrinks to the paper’s size while the rest of the picture is unchanged.
 
DifferencesConsumption responds more than in the paper (+0.50% against +0.2%), investment dips in the first quarter before rising, and the shock is larger (−85bp against −65bp). Today’s chain-weighted FRED data differ from the 2005 vintage precisely in how consumption and investment are deflated.