Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 125: An Alternative Explanation of the Price Puzzle

Paolo Giordani ()
Additional contact information
Paolo Giordani: Stockholm School of Economics, Department of Economics, Postal: Stockholm School of Economics , Department of Economics, Box 6501, SE-113 83 Stockholm, SWEDEN

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.

Keywords: VAR; monetary policy; misspecification; output gap; technology shocks.

JEL-codes: E30; E52

34 pages, September 1, 2001

Full text files

wp_125.pdf PDF-file 

Download statistics

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

This page generated on 2024-02-05 17:13:28.