Measuring Monetary Policy with VAR Models: An Evaluation

CEPR Discussion Paper Series No. 1743

45 Pages Posted: 10 Mar 1998

See all articles by Carlo A. Favero

Carlo A. Favero

Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics; Center for Research on Pensions and Welfare Policies (CeRP); University of Turin - Collegio Carlo Alberto

Date Written: November 1997

Abstract

This paper evaluates VAR models designed to analyze the monetary policy transmission mechanism in the United States by considering three issues: specification, identification, and the effect of the omission of the long-term interest rate. Specification analysis suggest that only VAR models estimated on a single monetary regime feature parameters stability and do not show signs of mis-specification. The identification analysis shows that VAR-based monetary policy shocks and policy disturbances identified from alternative sources are not highly correlated but yeld similar descriptions of the monetary transmission mechanism. Lastly, the inclusion of the long-term interest rate in a benchmark VAR delivers a more precise estimation of the structural parameters capturing behaviour in the market for reserves and shows that contemporaneous fluctuations in long-term interest rates are an important determinant of the monetary authority's reaction function.

JEL Classification: E44, E52

Suggested Citation

Favero, Carlo A. and Bagliano, Fabio C., Measuring Monetary Policy with VAR Models: An Evaluation (November 1997). CEPR Discussion Paper Series No. 1743, Available at SSRN: https://ssrn.com/abstract=65031

Carlo A. Favero (Contact Author)

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Fabio C. Bagliano

University of Turin - Department of Economics and Statistics ( email )

C. so Unione Sovietica, 218 Bis
Torino, I-10134
Italy
+39 011 670 6084 (Phone)
+39 011 670 6062 (Fax)

HOME PAGE: http://web.econ.unito.it/bagliano

Center for Research on Pensions and Welfare Policies (CeRP) ( email )

Via Real Collegio, 30
Moncalieri, Turin 10024
Italy

University of Turin - Collegio Carlo Alberto ( email )

via Real Collegio 30
Moncalieri, Torino 10024
Italy

Do you want regular updates from SSRN on Twitter?

Paper statistics

Downloads
214
Abstract Views
2,377
rank
194,480
PlumX Metrics