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Measuring monetary policy with VAR models: An evaluation

  • Bagliano, Fabio C.
  • Favero, Carlo A.

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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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 42 (1998)
Issue (Month): 6 (June)
Pages: 1069-1112

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Handle: RePEc:eee:eecrev:v:42:y:1998:i:6:p:1069-1112
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