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Title: Measuring Monetary Policy with VAR Models: An Evaluation

Author(s): Fabio-Cesare Bagliano and Carlo A. Favero

Publication Date: November 1997

Keyword(s): monetary transmission and VAR models

Programme Area(s): International Macroeconomics

Abstract: This paper evaluates VAR models designed to analyse 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 suggests that only VAR models estimated on a single monetary regime feature parameter 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 yield 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.

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Bibliographic Reference

Bagliano, F and Favero, C. 1997. 'Measuring Monetary Policy with VAR Models: An Evaluation'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=1743