Financial Conditions, Monetary Policy Shocks, and Recursive VARs: An Empirical Investigation for the U.S. Efrem Castelnuovo University of Padova September 2010 Abstract This paper estimates a DSGE model featuring macro-nance interactions with U.S. data. Our structural model predicts a negative and signicant reaction of the nancial conditions to an unexpected monetary policy tightening. However, a MonteCarlo exercise reveals that such reaction is overlooked by VARs in which the monetary policy shock is identied via the commonly employed Cholesky (zero) restrictions. The impulse responses of the Cholesky-VARs in our controlled exercise replicate, to a large extent, those obtained with actual U.S. data. JEL classication: E32, E44. Keywords: Kansas City Financial Stress Index, U.S. macroeconomic dynam- ics, nancial-macroeconomic interactions in a DSGE model, monetary policy shock, Cholesky-VARs. First version: June 2010. We thank Hilde C. Bjlrnland, Fabio Canova, Alberto Giavarra, Craig S. Hakkio, Kai Leitemo, Salvatore Nistic, Claudia Porcellato, and participants at the Second Work- shop on Monetary Policy (Oslo) for useful exchanges on this and a closely related project. Authors coordinates: Department of Economics, University of Padua, Via del Santo 33, I-35123 Padova (PD). E-mail: efrem.castelnuovo@unipd.it. Phone: +39 049 8274257. Fax: +39 049 8274211.