An alternative explanation of the price puzzle

Preprint
Publisher Website
Google Scholar
  • 1 January 2000
    • preprint
      • Published in RePEc
Abstract
This paper proposes a simple explanation for the frequent appearance of a price puzzle in VARs designed for monetary policy analysis. It suggests that the best method of solving the puzzle implies a close connection between theory and empirics rather than the introduction of a commodity price. It proves that the omission of a measure of output gap (or potential output) spuriously produces a price puzzle (and several other incorrect conclusions) in a wide class of commonly used models. This can happen even if the model admits a triangular identification and if the forecasts produced by the misspecified VAR are optimal. When the model is tested on US data, all predictions are supported.
All Related Versions

This publication has 0 references indexed in Scilit: