IDEAS home Printed from https://ideas.repec.org/p/hhs/rbnkwp/0077.html
   My bibliography  Save this paper

A VAR Model for Monetary Policy Analysis in a Small Open Economy

Author

Listed:
  • Jacobson, Tor

    (Research Department, Central Bank of Sweden)

  • Jansson, Per

    (Monetary Policy Department, Central Bank of Sweden)

  • Vredin, Anders

    (Research Department, Central Bank of Sweden)

  • Warne, Anders

    (Research Department, Central Bank of Sweden)

Abstract

The interest in empirical studies of monetary policy has increased in the last decade. The deregulation of financial markets and the increased use of explicit policy rules and targets have made monetary policy more transparent and interesting for economic analysis. This paper demonstrates how a VAR model with long run restrictions justified by economic theory can be usefully applied in analyses of issues central to monetary policy: the effects of innovations in interest rates and other shocks; the short and long run relationships between prices and nominal and real exchange rates; the properties of an index of monetary conditions; dynamic forecasts of inflation; and the relation between inflation and the output gap

Suggested Citation

  • Jacobson, Tor & Jansson, Per & Vredin, Anders & Warne, Anders, 1999. "A VAR Model for Monetary Policy Analysis in a Small Open Economy," Working Paper Series 77, Sveriges Riksbank (Central Bank of Sweden).
    • Handle: RePEc:hhs:rbnkwp:0077
    as

    Download full text from publisher

    File URL: http://www.riksbank.com/upload/991/WP_77.pdf
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Tor Jacobson & Anders Vredin & Anders Warne, 1998. "Are Real Wages and Unemployment Related?," Economica, London School of Economics and Political Science, vol. 65(257), pages 69-96, February.
    2. Ben S. Bernanke & Julio J. Rotemberg (ed.), 1997. "NBER Macroeconomics Annual 1997," MIT Press Books, The MIT Press, edition 1, volume 1, number 026252242x, December.
    3. Soderlind, Paul & Vredin, Anders, 1996. "Applied Cointegration Analysis in the Mirror of Macroeconomic Theory," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 11(4), pages 363-381, July-Aug..
    4. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
    5. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    6. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
    7. Ingram, Beth F. & Whiteman, Charles H., 1994. "Supplanting the 'Minnesota' prior: Forecasting macroeconomic time series using real business cycle model priors," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 497-510, December.
    8. Johansen, Soren & Juselius, Katarina, 1994. "Identification of the long-run and the short-run structure an application to the ISLM model," Journal of Econometrics, Elsevier, vol. 63(1), pages 7-36, July.
    9. Lippi, Marco & Reichlin, Lucrezia, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(3), pages 644-652, June.
    10. Julio J. Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361, National Bureau of Economic Research, Inc.
    11. Rudebusch, Glenn D, 1998. "Do Measures of Monetary Policy in a VAR Make Sense?," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 907-931, November.
    12. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-1580, November.
    13. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    14. Guy Debelle & Glenn Stevens, 1995. "Monetary Policy Goals for Inflation in Australia," RBA Research Discussion Papers rdp9503, Reserve Bank of Australia.
    15. Sims, Christopher A, 1998. "Comment on Glenn Rudebusch's "Do Measures of Monetary Policy in a VAR Make Sense?"," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 39(4), pages 933-941, November.
    16. Vredin, Anders & Warne, Anders, 1991. " Current Account and Macroeconomic Fluctuations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 93(4), pages 511-530.
    17. Hendry, D.F. & Mizon, G.E., 1990. "Evaluating Dynamic Econometric Models By Encompassing The Var," Economics Series Working Papers 99102, University of Oxford, Department of Economics.
    18. A. I. McLeod & W. K. Li, 1983. "Diagnostic Checking Arma Time Series Models Using Squared‐Residual Autocorrelations," Journal of Time Series Analysis, Wiley Blackwell, vol. 4(4), pages 269-273, July.
    19. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
    20. Perron, Pierre, 1989. "The Great Crash, the Oil Price Shock, and the Unit Root Hypothesis," Econometrica, Econometric Society, vol. 57(6), pages 1361-1401, November.
    21. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
    22. Faust, Jon & Leeper, Eric M, 1997. "When Do Long-Run Identifying Restrictions Give Reliable Results?," Journal of Business & Economic Statistics, American Statistical Association, vol. 15(3), pages 345-353, July.
    23. Gamber, Edward N & Joutz, Frederick L, 1993. "The Dynamic Effects of Aggregate Demand and Supply Disturbances: Comment," American Economic Review, American Economic Association, vol. 83(5), pages 1387-1393, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Norrbin, Stefan, 2001. "What Have We Learned from Empirical Tests of the Monetary Transmission Effect," Working Paper Series 121, Sveriges Riksbank (Central Bank of Sweden).
    2. Thomas Lindh, 2004. "Medium-term forecasts of potential GDP and inflation using age structure information," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(1), pages 19-49.
    3. Héctor Bravo L. & Carlos García T., 2002. "Measuring Monetary Policy and Pass-Through in Chile," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, vol. 5(3), pages 5-28, December.
    4. Tae-Seok Jang & Eiji Okano, 2015. "Productivity Shocks and Monetary Policy in a Two-Country Model," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 10(1), pages 7-37, March.
    5. Tor Jacobson & Per Jansson & Anders Vredin & Anders Warne, 2001. "Monetary policy analysis and inflation targeting in a small open economy: a VAR approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(4), pages 487-520.
    6. Mukesh Khanal, 2011. "Monetary Neutrality in the Nepalese Economy during 1975-2008," NRB Economic Review, Nepal Rastra Bank, Research Department, vol. 23(1), pages 71-91, April.
    7. Grand Nathalie & Dropsy Vincent, 2005. "Exchange Rate And Inflation Targeting In Morocco And Tunisia," Macroeconomics 0507018, University Library of Munich, Germany.
    8. Hilde C. Bjørnland, 1998. "Economic Fluctuations in a Small Open Economy - Real versus Nominal Shocks," Discussion Papers 215, Statistics Norway, Research Department.
    9. David Mayes & Matti Virén, 2000. "The exchange rate and monetary conditions in the Euro area," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 136(2), pages 199-231, June.
    10. Mukesh Khanal, 2011. "Monetary Neutrality in the Nepalese Economy during 1975-2008," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 23(1), pages 71-91, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tor Jacobson & Per Jansson & Anders Vredin & Anders Warne, 2001. "Monetary policy analysis and inflation targeting in a small open economy: a VAR approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 16(4), pages 487-520.
    2. Carlo A. Favero, 2009. "The Econometrics of Monetary Policy: An Overview," Palgrave Macmillan Books, in: Terence C. Mills & Kerry Patterson (ed.), Palgrave Handbook of Econometrics, chapter 16, pages 821-850, Palgrave Macmillan.
    3. Imke Brüggemann, 2003. "Measuring Monetary Policy in Germany: A Structural Vector Error Correction Approach," German Economic Review, Verein für Socialpolitik, vol. 4(3), pages 307-339, August.
    4. Hilde C. Bjørnland, 1998. "Economic Fluctuations in a Small Open Economy - Real versus Nominal Shocks," Discussion Papers 215, Statistics Norway, Research Department.
    5. Charles G. Renfro, 2009. "The Practice of Econometric Theory," Advanced Studies in Theoretical and Applied Econometrics, Springer, number 978-3-540-75571-5, July-Dece.
    6. Imke Brüggemann, 2003. "Measuring Monetary Policy in Germany: A Structural Vector Error Correction Approach," German Economic Review, Verein für Socialpolitik, vol. 4, pages 307-339, August.
    7. Accolley, Delali, 2018. "Accounting for Busines Cycles in Canada: II. The Role of Money," MPRA Paper 85481, University Library of Munich, Germany.
    8. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    9. Faust, Jon & Rogers, John H., 2003. "Monetary policy's role in exchange rate behavior," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1403-1424, October.
    10. Gulzar Ali & Said Zamin Shah & Ghulam Mustafa, 2019. "Testing the Reliability and Existence of IS-LM Model for Pakistan," Global Economics Review, Humanity Only, vol. 4(2), pages 13-23, June.
    11. Nikolaus A. Siegfried, 2002. "An information-theoretic extension to structural VAR modelling," Quantitative Macroeconomics Working Papers 20203, Hamburg University, Department of Economics.
    12. Monticello, Carlo & Tristani, Oreste, 1999. "What does the single monetary policy do? A SVAR benchmark for the European Central Bank," Working Paper Series 0002, European Central Bank.
    13. Lindé, Jesper, 2003. "Monetary Policy Shocks and Business Cycle Fluctuations in a Small Open Economy: Sweden 1986-2002," Working Paper Series 153, Sveriges Riksbank (Central Bank of Sweden).
    14. Meurers Martin, 2004. "Estimating Supply and Demand Functions in International Trade: A Multivariate Cointegration Analysis for Germany / Die Schätzung von Angebots- und Nachfragefunktionen im Außenhandel: Eine multivariate," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 224(5), pages 530-556, October.
    15. Carlo A. Favero, 2007. "Model Evaluation in Macroeconometrics: from early empirical macroeconomic models to DSGE models," Working Papers 327, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    16. Ericsson, Neil R & Hendry, David F & Mizon, Grayham E, 1998. "Exogeneity, Cointegration, and Economic Policy Analysis," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 370-387, October.
    17. Rault, Christophe, 2005. "Further Results on Weak Exogeneity in Vector Error Correction Models," Brazilian Review of Econometrics, Sociedade Brasileira de Econometria - SBE, vol. 25(2), November.
    18. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
    19. Ida Wolden Bache, 2008. "Assessing estimates of the exchange rate pass-through," Working Paper 2007/12, Norges Bank.
    20. René Lalonde & Jennifer Page & Pierre St-Amant, 1998. "Une nouvelle méthode d'estimation de l'écart de production et son application aux États-Unis, au Canada et à l'Allemagne," Staff Working Papers 98-21, Bank of Canada.

    More about this item

    Keywords

    Cointegration; Common stochastic trends; Monetary policy; Vector autoregressions;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:hhs:rbnkwp:0077. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Lena Löfgren (email available below). General contact details of provider: https://edirc.repec.org/data/rbgovse.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.