DP2333 Monetary Policy Misspecification in VAR Models

Author(s): Fabio Canova, Joaquim Pivis Pina
Publication Date: December 1999
Keyword(s): General Equilibrium, identification, Monetary Policy, Structural VARs
JEL(s): C32, C68, E32, E52
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2333

We examine the effects of extracting monetary policy disturbances with semi-structural and structural VARs, using data generated by a limited participation model under partial accommodative and feedback rules. We find that, in general, misspecification is substantial: short run coefficients often have wrong signs; impulse responses and variance decompositions give misleading representations of the dynamics. Explanations for the results and suggestions for macroeconomic practice are provided.