Identifying Unconventional Monetary Policy Shock Using Narrative Sign Restrictions Approach

Authors
mahboobeh khadem nematollahi
Teymour mohammadi
Abbas Shakeri
Ali asghar Salem
Abstract
The aim of this paper was to estimate the effects of unconventional monetary policy shocks using Narrative sign restrictions method as a novel method, imposing sign restriction on the impulse responses of real interest rate, GDP, GDP price deflator, nonborrowed reserves as well as Total Reserves in response to monetary policy shocks in Iran. Using Narrative sign restrictions model for the period 1983-2020 enables considering the effects of aforementioned five variables as well as identifying the effect of monetary policy shocks on these variables. Narrative sign restrictions constrain signs based on narrative information. According to the liquidity effect, results of the impulse responses function highlights decreasing real interest rate causes increasing in aggregate demand and GDP. With Narrative sign restrictions, real interest rate shocks also have significant impact on GDP through increasing it. To this aim, according to results and also with regard to the importance of unconventional monetary policy in response to crisis, this policy can be applied for resolving stagflation and this supplement policy can be applied besides other policies of Central Bank.
Keywords
Unconventional monetary policy
Quantitative Easing
Narrative sign restrictions
Identification
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