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NATIONAL BUREAU OF ECONOMIC RESEARCH
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Identifying monetary policy in macro-finance models

David Backus, Mikhail Chernov, Stanley E. Zin, Irina Zviadadze

NBER Working Paper No. 19360
Issued in August 2013, Revised in December 2018
NBER Program(s):Asset Pricing, Economic Fluctuations and Growth

Identification problems arise in New Keynesian and macro-finance models when the Taylor rule includes both responses to observable variables like inflation and output, and a shock unseen by economists. Identification of the rule's parameters requires additional restrictions on this unobserved shock. We demonstrate how this can be accomplished in a macro term structure model using only long-run neutrality restrictions consistent with a wide variety of theories. The resulting Taylor rule is comparable to those commonly found in the literature. The unobserved shock is closely related to the slope factor of empirical term structure models.

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Document Object Identifier (DOI): 10.3386/w19360

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