Controlling Inflation in a Cointergrated Vector Autoregressive Model with an Application to US Data
AbstractThe notions of instrument, intermediate target and final target are defined in the context of the cointegrated VAR. A target variable is said to be controllable if it can be made stationary around a desired target value by using the instrument. This can be expressed as a condition on the long-run impact matrix. Applying a control rule to intervene in the market changes the dynamics of the process and the properties of the new controlled process have to be derived. The theoretical results are applied to US monetary data on a daily and monthly basis. The empirical results do not provide support for the widely held belief that the Federal Reserve Bank can bring US CPI inflation down by increasing the federal funds rate.
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Bibliographic InfoPaper provided by European University Institute in its series Economics Working Papers with number ECO2001/02.
Date of creation: 2001
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- Soren Johansen & Katarina Juselius, 2001. "Controlling Inflation in a Cointegrated Vector Autoregressive Model with an Application to US Data," Discussion Papers 01-03, University of Copenhagen. Department of Economics.
- C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables
- E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
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