An Alternative Explanation of the Price Puzzle

Paolo Giordani ()

No 125, Working Paper Series from Sveriges Riksbank (Central Bank of 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. (search for similar items in EconPapers)
JEL-codes: E30 E52 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2001-09-01
New Economics Papers: this item is included in nep-ent, nep-mon and nep-net
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Journal of Monetary Economics, 2004, pages 1271-1296.

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http://www.riksbank.se/upload/Dokument_riksbank/Kat_foa/wp_125.pdf (application/pdf)

Related works:
Journal Article: An alternative explanation of the price puzzle (2004)
Working Paper: An alternative explanation of the price puzzle (2001)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:rbnkwp:0125

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