An alternative explanation of the price puzzle

Paolo Giordani ()

No 414, Working Paper Series in Economics and Finance from 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 (search for similar items in EconPapers)
JEL-codes: E30 E52 (search for similar items in EconPapers)
Date: 2000-12-04, Revised 2001-11-19

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Related works:
Working Paper: An Alternative Explanation of the Price Puzzle (2001)
Journal Article: An alternative explanation of the price puzzle (2004)
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Persistent link: http://EconPapers.repec.org/RePEc:hhs:hastef:0414

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