Bagliano and Favero construct exogenous measures of monetary-policy shocks directly from financial-market information — the implicit forward-rate curve — and use them in closed-economy (US) and open-economy (US–Germany) VAR models to check the robustness of the dynamic effects of monetary policy estimated from traditional identified VARs. The market-based measures confirm the main features of the transmission mechanism in both the US and Germany, and the open-economy analysis explicitly addresses the simultaneity between the German policy interest rate and the US-dollar/Deutsche-Mark exchange rate.
"Exogenous measures of monetary policy shocks, directly derived from financial market information, are used in close (US) and open (US–Germany) economy VAR models to evaluate the robustness of the dynamic effect of monetary policy obtained from traditional identified VAR."
The natural sequel to Bagliano-Favero (1998): having shown that VAR-identified and alternative-source policy shocks agree on the mechanism if not on the series, here they lean into the market-based alternative and use the forward-rate curve to build an exogenous shock measure — a precursor of the high-frequency/market-instrument identification that later became standard (external instruments, Gürkaynak-Sack-Swanson). The open-economy angle is the distinctive contribution: getting the German-rate/exchange-rate simultaneity right is exactly where recursive Cholesky orderings are least convincing, so a market-derived instrument earns its keep. As with the 1998 paper, the value is methodological reassurance rather than a new stylized fact — the transmission mechanism survives a genuinely different identification strategy.