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Measuring Monetary Policy with VAR Models: An Evaluation

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  • Bagliano, Fabio-Cesare
  • Favero, Carlo A

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1743.

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Date of creation: Nov 1997
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Handle: RePEc:cpr:ceprdp:1743

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Keywords: monetary transmission; VAR models;

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