We propose a novel approach that embeds Rational Expectations (RE) into a low-dimensional structural vector autoregression (SVAR). We establish an instrumental variable procedure internal to the SVAR founded on a purely theoretical framework, which does not rely on any mapping strategy to a reduced form. Alternatively, a separate strategy considers data external to the SVAR to aid in the identification of structural shocks on a purely empirical basis. We report clouds of responses from a RE-consistent theoretical model as well as regions of plausible responses from the empirical approach. We conclude that a Taylor Rule characterization of monetary policy shocks remains relevant when the theoretical RE-SVAR is properly augmented with information from fluctuations—or momentous events—in markets that garnered increased attention since 2008, such as reserves and various money markets.
Chen, Zhengyang and Valcarcel, Victor, "Embedding Rational Expectations in a Structural VAR: Internal and External Instruments for Set Identification" (2022). Economics Faculty Working Papers. 27.