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Anticipatory Monetary Policy and the 'Price Puzzle'

James Bishop and Peter Tulip

RBA Research Discussion Papers from Reserve Bank of Australia

Abstract: Vector autoregression (VAR) models often find that inflation increases in response to a tightening in monetary policy, although standard macroeconomics predicts the opposite. This 'price puzzle' is commonly thought to reflect interest rates being tightened in anticipation of future inflation, reflecting information possessed by policymakers beyond that contained in the model. Romer and Romer (2004) and Cloyne and Hürtgen (2016) successfully remove the price puzzle from US and UK data, respectively, by purging the cash rate of systematic policy responses to central bank forecasts. We find that this approach does not work for Australia under a wide range of specifications. This suggests that VARs may not be the most reliable way to analyse monetary policy.

Keywords: price puzzle; monetary policy; VARs (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Date: 2017-05
New Economics Papers: this item is included in nep-cba, nep-dcm, nep-mac and nep-mon
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