Empirical analysis of the impact of monetary policy in the Euro Area: How do monetary policy shocks affect financial markets and economic activity in the Euro Area?

Abstract

This paper studies the effects of monetary policy in the aggregate Euro Area. Contrary to traditional money shock analysis, this paper uses a vector autoregressive model and estimates the structural shocks through an external instrument identification approach, employing high-frequency financial data as instrument. The model inhibits economic as well as financial variables and uses the movement of Eurozone overnight index swaps around monetary policy meetings as proxy for unexpected monetary policy shocks. The results show, that a contractionary monetary policy shock behaves contrary to theory, indicating a bias in high-frequency identification.Apart from theapplication ofhigh-frequency identification,this paper contributes to the literature by using Python for the estimation and identification of the model.