New VAR evidence on monetary transmission channels: temporary interest rate versus inflation target shocks

Elizaveta Lukmanova and Katrin Rabitsch

No 630040, Working Papers Department of Accountancy, Finance and Insurance (AFI), Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Accountancy, Finance and Insurance (AFI), Leuven

Abstract: We augment a standard monetary VAR on output growth, inflation and the nominal interest rate with the central bank's inflation target, which we estimate from a New Keynesian DSGE model. Inflation target shocks give rise to a simultaneous increase in inflation and the nominal interest rate in the short run, at no output expense, which stands at the center of an active current debate on the Neo-Fisher effect. In addition, accounting for persistent monetary policy changes reflected in inflation target changes improves identification of a standard temporary nominal interest rate shock in that it strongly alleviates the price puzzle.

Pages: 43
Date: 2018-11-28
Note: paper number DPS 18.13
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Published in FEB Research Report Department of Economics

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Persistent link: https://EconPapers.repec.org/RePEc:ete:afiper:630040

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