SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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.

Keywords: Price puzzle; monetary policy; misspecification; output gap; potential output; technology shocks; VAR

JEL-codes: E30; E52

37 pages, First version: December 4, 2000. Revised: November 19, 2001. Earlier revisions: December 6, 2000, December 7, 2000, December 11, 2000, January 8, 2001, January 8, 2001, January 30, 2001, November 2, 2001, October 2, 2001, November 2, 2001.

Full text files

hastef0414.pdf  Full text

Download statistics

• Stockholm School of Economics
• Home page for this series

Questions (including download problems) about the papers in this series should be directed to Helena Lundin ()
Report other problems with accessing this service to Sune Karlsson ().

RePEc:hhs:hastef:0414This page generated on 2024-09-13 22:15:05.