Identifying and estimating the effects of monetary policy shocks is not straightforward. The introduction of new monetary policy tools (such as forward guidance and asset purchases) has even added new issues to the list.

The article intends to shed light on the complexities at hand. It addresses the following questions: What are monetary policy shocks? What are the challenges involved in identifying these shocks in general and more specifically in a VAR model, and how can these be overcome? How are monetary policy shocks transmitted through the economy? With respect to the latter question, the empirical exercise singles out one method of assessing how the ECB’s standard policy instrument (working via changes in short-term rates) and non-standard measures (working via changes in long-term rates) impact euro area output and prices. The effect on key Belgian macroeconomic variables is also briefly touched upon.