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Controlling Inflation in a Cointegrated Vector Autoregressive Model with an Application to US Data

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  • Soren Johansen

    (European University Institute, Florence)

  • Katarina Juselius

    (Institute of Economics, University of Copenhagen)

Abstract

The 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 Info

Paper provided by University of Copenhagen. Department of Economics in its series Discussion Papers with number 01-03.

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Length: 41 pages
Date of creation: Jan 2001
Date of revision:
Handle: RePEc:kud:kuiedp:0103

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Keywords: Inflation Target; Monetary Instruments; Control Rules;

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Cited by:
  1. Juselius, Katarina & Toro, Juan, 2005. "Monetary transmission mechanisms in Spain: The effect of monetization, financial deregulation, and the EMS," Journal of International Money and Finance, Elsevier, Elsevier, vol. 24(3), pages 509-531, April.
  2. Fabrizio Coricelli & Boštjan Jazbec & Igor Masten, 2004. "Exchange Rate Policy and Inflation in Acceding Countries: The Role of Pass-through," William Davidson Institute Working Papers Series 2004-674, William Davidson Institute at the University of Michigan.
  3. Davide Pettenuzzo & Halbert White, 2010. "Granger Causality, Exogeneity, Cointegration, and Economic Policy Analysis," Working Papers, Brandeis University, Department of Economics and International Businesss School 36, Brandeis University, Department of Economics and International Businesss School.
  4. Eleftheriou, Maria, 2009. "Monetary policy in Germany: A cointegration analysis on the relevance of interest rate rules," Economic Modelling, Elsevier, Elsevier, vol. 26(5), pages 946-960, September.
  5. Cassola, Nuno & Morana, Claudio, 2002. "Monetary policy and the stock market in the euro area," Working Paper Series, European Central Bank 0119, European Central Bank.
  6. Ansgar Belke & Marcel Wiedmann, 2013. "Monetary Policy, Stock Prices and Central Banks - Cross-Country Comparisons of Cointegrated VAR Models," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0435, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  7. Reimers, Hans-Eggert, 2002. "Analysing Divisia Aggregates for the Euro Area," Discussion Paper Series 1: Economic Studies 2002,13, Deutsche Bundesbank, Research Centre.
  8. Blake LeBaron, 2013. "Heterogeneous Agents and Long Horizon Features of Asset Prices," Working Papers, Brandeis University, Department of Economics and International Businesss School 63, Brandeis University, Department of Economics and International Businesss School, revised Sep 2013.
  9. Igor Masten & Bostjan Jazbec & Fabrizio Coricelli, 2004. "L’influence du régime de change sur l’inflation dans les pays adhérents," Économie et Prévision, Programme National Persée, Programme National Persée, vol. 163(2), pages 51-61.

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