The rst seven variables contain information about the general state of the economy and help to identify monetary policy and capital in ows shocks. The model includes both short-term and long-term interest rates. In our sample of countries short-term interest rates are largely controlled by central banks. Using movements in nominal short rates to identify monetary policy shocks is standard in VARs that study monetary policy (see eg Christiano et al (1999)). Long-term interest rates, on the other hand, tend to be driven by nancial market outcomes. As a result, one would expect to observe the effects of capital in ows shocks on long rates rather than short.
