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Brownbag Seminars: New Evidence on Monetary Transmission: Interest Rate versus Inflation Target Shocks

CEU Vienna campus
Wednesday, October 27, 2021, 12:00 pm – 1:00 pm

Abstract: This paper presents new empirical evidence on monetary transmission by incorporating two types of shocks -- a standard temporary interest rate shock and a persistent inflation target shock. In an estimated DSGE model under imperfect information, in which we address the concern that agents, in reality, may not be able to distinguish between these two types, we find delayed Neo-Fisherian behavior in response to the persistent shock: interest rate and inflation increase, but with a lag. In an empirical VAR model that accounts for such uncertainty in identifying assumptions, we similarly find evidence for positive co-movement of interest rates and inflation in the short aftermath of the persistent shock, however, not on impact. This finding suggests that agents need time to learn the nature of the monetary shock and adjust their expectations, consistent with the predictions of the DSGE model under imperfect information.