An empirical investigation of the effects of monetary policy shocks on the Italian economy

We assess empirically the effects of monetary policy shocks on the Italian economy through the lenses of a heteroskedastic SVAR model. The identifying information provided by the time variation in the volatility of the structural shocks is complemented with sign and narrative restrictions. The presence of heteroskedasticty is strongly supported by the data and sharpens significantly the uncertainty about IRFs. Our results show that monetary policy contractions reduce inflation and output growth, generating a significant increase in the Corporate Bond Spread. On the other hand, the response of the Euro-Dollar exchange rate and the Italy-Germany sovereign spread is not significantly affected. • Monetary policy shocks lower Italian inflation and output growth. • Contractions raise corporate bond spreads significantly. • Exchange rate and Italy-Germany spread remain largely unaffected. • Heteroskedasticity sharpens inference with added restrictions.