Measuring Monetary Policy with VAR Models: An Evaluation

Fabio C. Bagliano () and Carlo Favero ()

No 1743, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper evaluates VAR models designed to analyse the monetary policy transmission mechanism in the United States by considering three issues: specification, identification, and the effect of the omission of the long-term interest rate. Specification analysis suggests that only VAR models estimated on a single monetary regime feature parameter stability and do not show signs of mis-specification. The identification analysis shows that VAR-based monetary policy shocks and policy disturbances identified from alternative sources are not highly correlated but yield similar descriptions of the monetary transmission mechanism. Lastly, the inclusion of the long-term interest rate in a benchmark VAR delivers a more precise estimation of the structural parameters capturing behaviour in the market for reserves and shows that contemporaneous fluctuations in long-term interest rates are an important determinant of the monetary authority’s reaction function.

Keywords: monetary transmission; VAR models (search for similar items in EconPapers)
JEL-codes: E44 E52 (search for similar items in EconPapers)
Date: 1997-11
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Working Paper: Measuring Monetary Policy with VAR Models: an Evaluation
Journal Article: Measuring monetary policy with VAR models: An evaluation (1998)
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