Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/82493
Authors: 
Giordani, Paolo
Year of Publication: 
2001
Series/Report no.: 
Sveriges Riksbank Working Paper Series 125
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 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. In the framework of a model due to Svensson, the omission of a measure of output gap is shown to generate several other incorrect conclusions. When the model is tested on US data, all predictions are supported.
Subjects: 
VAR
monetary policy
misspecification
output gap
technology shocks.
JEL: 
E30
E52
Document Type: 
Working Paper

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