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Monetary Policy Misspecification in VAR Models

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  • Canova, Fabio
  • Pina, Joaquim Pivis

Abstract

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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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 2333.

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Date of creation: Dec 1999
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Handle: RePEc:cpr:ceprdp:2333

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Keywords: General Equilibrium; identification; Monetary Policy; Structural VARs;

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