The price puzzle: Mixing the temporary and permanent monetary policy shocks

Ida Wolden Bache and Kai Leitemo
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Ida Wolden Bache: Norges Bank (Central Bank of Norway)

No 2008/18, Working Paper from Norges Bank

Abstract: We argue that the correct identification of monetary policy shocks in a vector autoregression requires that the identification scheme distinguishes between permanent and transitorymonetary policy shocks. The permanent shocks reflect changes in the inflation target while the transitory shocks represent temporary deviations from the interest rate reaction function. Whereas both shocks may raise the nominal interest rate on impact, the inflation and output responses of the two shocks are different. We show, using a simple simulation experiment, that a failure to distinguish between the two types of shocks can result in a ”price puzzle”.

Keywords: Monetary policy shocks; VAR modeling; identification; price puzzle (search for similar items in EconPapers)
JEL-codes: E47 E52 E61 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2008-11-03
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:bno:worpap:2008_18

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