Riassunto analitico
In this paper, I use a Proxy SVAR analysis (Stock, 2008, Mertens and Ravn, 2013) to answer a big question that remains open in economic literature about central bank capacity: is monetary policy effective in controlling prices?
Two recent papers concerning this issue express opposing views. According to Forni, Gambetti and Ricco (2023), a monetary policy shock has important effects on prices. In contrast, according to Plagborg-Møller and Wolf (2022) these effects are zero or very modest. This issue is central because if the monetary policy shock has no or modest price effects, then monetary policy cannot be used to control prices. That is, the Central Bank necessarily fails its mandate.
In this paper I explore this question using the new ''Generalized External-Instrument SVAR'' methodology proposed by Forni, Gambetti and Ricco (2023). The most important difference with Forni, Gambetti and Ricco (2023) is that here I use the instrument of Miranda-Agrippino and Ricco (2021) rather than the one of Gertler and Karadi (2015). The logic of this choice lies in the fact that, as explained by Ramey (2016), the instrument used by by Gertler and Karadi (2015) is autocorrelated and predictable (Miranda-Agrippino, 2016). Both instruments are based on high frequency financial data, as suggested by Gürkaynak et al. (2005), but the proxy proposed by Miranda-Agrippino and Ricco (2021) is preferable, in that it is not affected by the above problems.
My results confirm those of Forni, Gambetti and Ricco (2023). In fact, I find that the monetary policy shock explains a non-negligible fraction of the volatility of prices (between 12% and 17%, depending on the VAR specification adopted). The effects on industrial production are of the same order of magnitude, so the cost to be paid in terms of economic activity to reduce inflation is not enormous, unlike in Plagborg-Møller and Wolf (2022).
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