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http://hdl.handle.net/10419/56084
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| Title: | | An alternative explanation of the prize puzzle  |
| Authors: | | Giordani, Paolo |
| Issue Date: | | 2001 |
| Series/Report no.: | | SSE/EFI Working Paper Series in Economics and Finance 414 |
| Abstract: | | This paper proposes a simple explanation for the frequent appearance of a price puzzle in VARs designed for monetary policy analysis. It suggests that the best method of solving the puzzle implies a close connection between theory and empirics rather than the introduction of a commodity price. It proves that the omission of a measure of output gap (or potential output) spuriously produces a price puzzle (and several other incorrect conclusions) in a wide class of commonly used models. This can happen even if the model admits a triangular identification and if the forecasts produced by the misspecified VAR are optimal. When the model is tested on US data, all predictions are supported. |
| Subjects: | | Price puzzle monetary policy misspecification output gap potential output technology shocks VAR |
| JEL: | | E30 E52 |
| Document Type: | | Working Paper |
| Appears in Collections: | | SSE/EFI Working Paper Series in Economics and Finance, EFI - The Economic Research Institute, Stockholm School of Economics
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