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THE PRICE PUZZLE AND VAR IDENTIFICATION

Published online by Cambridge University Press:  12 May 2014

Arturo Estrella
Arturo Estrella*
Affiliation:
Rensselaer Polytechnic Institute
*
Address correspondence to: Arturo Estrella, Russell Sage Laboratory, Rensselaer Polytechnic Institute, 110 8th Street, Troy, NY 12180, USA; e-mail: [email protected].
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Abstract

In structural VARs, unexpected monetary tightening often leads to the price puzzle, a counterintuitive increase in inflation in the impulse response function. The identification of impulse responses requires at least a minimal set of structural assumptions, and models exhibiting the price puzzle typically use standard assumptions focusing mainly on relationships among contemporaneous disturbances. This note uses a well-established stylized fact, the long lags of monetary policy, to motivate a simple additional identifying assumption. The assumption eliminates a single term in one equation of the reduced form, and with it the price puzzle.

Keywords

Vector AutoregressionMonetary PolicyPolicy Lag
Type
Notes
Information
Macroeconomic Dynamics , Volume 19 , Issue 8 , December 2015 , pp. 1880 - 1887
Copyright
Copyright © Cambridge University Press 2014 

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