DP11374 Gaussian Mixture Approximations of Impulse Responses and The Non-Linear Effects of Monetary Shocks
This paper proposes a new method to estimate the (possibly non-linear)
dynamic effects of structural shocks by using Gaussian basis functions to
parametrize impulse response functions. We apply our approach to the study
of monetary policy and obtain two main results. First, regardless of whether
we identify monetary shocks from (i) a timing restriction, (ii) sign
restrictions, or (iii) a narrative approach, the effects of monetary policy
are highly asymmetric: A contractionary shock has a strong adverse effect on
unemployment, but an expansionary shock has little effect. Second, an
expansionary shock may have some expansionary effect, but only when the
labor market has some slack. In a tight labor market, an expansionary shock
generates a burst of inflation and no significant change in unemployment.
