Discussion paper

DP2333 Monetary Policy Misspecification in VAR Models

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.

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Citation

Canova, F and J Pina (1999), ‘DP2333 Monetary Policy Misspecification in VAR Models‘, CEPR Discussion Paper No. 2333. CEPR Press, Paris & London. https://cepr.org/publications/dp2333