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Monetary policy, inflation expectations and the price puzzle

Author: Efrem Castelnuovo; Paolo Surico
Publisher: Helsinki : Suomen Pankki, 2009.
Series: Bank of Finland Discussion papers, 30/2009.
Edition/Format:   eBook : Document : EnglishView all editions and formats
Database:WorldCat
Summary:
This paper re-examines the VAR evidence on the price puzzle and proposes a new theoretical interpretation. Using actual data and two identification strategies based on zero restrictions and model-consistent sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the sub-samples that are typically associated with a weak interest rate response to inflation.  Read more...
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Details

Material Type: Document, Internet resource
Document Type: Internet Resource, Computer File
All Authors / Contributors: Efrem Castelnuovo; Paolo Surico
ISBN: 9789524625494 9524625490 9789524625487 9524625482
OCLC Number: 502452680
Description: 1 online resource (Text.)
Series Title: Bank of Finland Discussion papers, 30/2009.
Responsibility: Efrem Castelnuovo, Paolo Surico.

Abstract:

This paper re-examines the VAR evidence on the price puzzle and proposes a new theoretical interpretation. Using actual data and two identification strategies based on zero restrictions and model-consistent sign restrictions, we find that the positive response of prices to a monetary policy shock is historically limited to the sub-samples that are typically associated with a weak interest rate response to inflation. Using pseudo data generated by a sticky price model of the US economy, we then show that the structural VARs are capable of reproducing the price puzzle only when monetary policy is passive. The omission in the VARs of a variable capturing expected inflation is found to account for the price puzzle observed in simulated and actual data.

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