Identifying and Estimating the Effects of Unconventional Monetary Policy in the Data: How to Do It and What Have We Learned?

Abstract

How should one identify monetary policy shocks in unconventional times? Are unconventional monetary policies as effective as conventional ones? And has the transmission mechanism of monetary policy changed in the zerolower bound era? The recent Önancial crisis led Central banks to lower their interest rates in order to stimulate the economy, and interest rates in many advanced economies hit the zero lower bound. As a consequence, the traditional approach to the identification and the estimation of monetary policy faces new econometric challenges in unconventional times. This article aims at providing a broad overview of the recent literature on the identification of unconventional monetary policy shocks and the estimation of their effects on both financial as well as macroeconomic variables. Given that the prospects of slow recoveries and long periods of very low interest rates are becoming the norm, many economists believe that we are likely to face unconventional monetary policy measures often in the future. Hence, these are potentially very important issues in practice.