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First published in Journal of Economic Dynamics and Control, v170 (Jan 2025) published by Elsevier B.V. DOI: https://doi.org/10.1016/j.jedc.2024.104999

Document Type

Article

Publication Version

Published Version

Keywords

Monetary policy, Rational expectations, VAR, RE-SVAR, Price puzzle, Money growth rules, Divisia, Inflation expectations, Monetary transmission

Journal/Book/Conference Title

Journal of Economic Dynamics and Control

Volume

170

First Page

1

Last Page

21

Abstract

We propose a novel approach that directly embeds rational expectations (RE) into a low-dimensional structural vector autoregression (SVAR) without the need for any mapping to a dynamic stochastic general equilibrium (DSGE) model. Beginning from a fully specified “consensus” structural model, we establish an instrumental variable procedure internal to the SVAR to obtain RE-consistent structural responses to identified monetary policy shocks. Our RE-SVAR framework facilitates a comparison across two alternative monetary policy indicators that accommodate long horizons in the formation of inflation expectations in the policy rule. We construct clouds of responses of inflation and economic activity to monetary policy shocks. We find large regions of puzzling responses to innovations in the federal funds rate. This suggests that indicator often requires being augmented with more information in standard VAR settings. A money growth rule characterization—with Divisia M4 as a policy indicator—exhibits comparatively larger regions of sensible responses within a low-dimensional textbook model of the economy.

Department

Department of Economics

Original Publication Date

1-2025

Object Description

1 PDF File

DOI of published version

10.1016/j.jedc.2024.104999

Repository

UNI ScholarWorks, Rod Library, University of Northern Iowa

Copyright

©2024 The Author(s). This is an open access article under the CC BY-NC-ND license.

Language

en

File Format

application/pdf

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