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Monetary policy shocks, inflation persistence, and long memory

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  • Lovcha, Yuliya
  • Perez-Laborda, Alejandro

Abstract

Structural VAR studies on the effects of monetary policy actions do not usually take into consideration the observed persistence of inflation and many of the other variables included in the models. In this paper, we account for this issue by analyzing the effects of the monetary policy shock in a structural fractionally integrated VAR. Our main findings are: a) there is overwhelming evidence of long memory, with the traditional framework, decisively rejected by the data; b) allowing for long memory has strong implications for the analysis of the responses of the variables to non-systematic policy actions; c) typical VAR specifications lead to a misleading assessment of the importance of the monetary policy shock; d) the long memory properties of inflation remain stable across the usual sample splits in the literature, consistent with the view that long memory is an intrinsic property of inflation data arising in the construction of the price indexes. This result is robust to alternative specifications of the model.

Suggested Citation

  • Lovcha, Yuliya & Perez-Laborda, Alejandro, 2018. "Monetary policy shocks, inflation persistence, and long memory," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 117-127.
  • Handle: RePEc:eee:jmacro:v:55:y:2018:i:c:p:117-127
    DOI: 10.1016/j.jmacro.2017.10.006
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    Cited by:

    1. Geronikolaou, George & Spyromitros, Eleftherios & Tsintzos, Panagiotis, 2020. "Progressive taxation and human capital as determinants of inflation persistence," Economic Modelling, Elsevier, vol. 88(C), pages 82-97.
    2. Lovcha, Yuliya & Perez-Laborda, Alejandro, 2020. "Dynamic frequency connectedness between oil and natural gas volatilities," Economic Modelling, Elsevier, vol. 84(C), pages 181-189.
    3. Granville, Brigitte & Zeng, Ning, 2019. "Time variation in inflation persistence: New evidence from modelling US inflation," Economic Modelling, Elsevier, vol. 81(C), pages 30-39.
    4. Tule, Moses K. & Salisu, Afees A. & Ebuh, Godday U., 2020. "A test for inflation persistence in Nigeria using fractional integration & fractional cointegration techniques," Economic Modelling, Elsevier, vol. 87(C), pages 225-237.
    5. Dräger, Lena & Kolaiti, Theoplasti & Sibbertsen, Philipp, 2020. "Measuring Macroeconomic Convergence and Divergence within EMU Using Long Memory," Hannover Economic Papers (HEP) dp-675, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
    6. Lubos Hanus & Lukas Vacha, 2018. "Time-Frequency Response Analysis of Monetary Policy Transmission," Working Papers IES 2018/30, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Oct 2018.

    More about this item

    Keywords

    Fractional integration; FIVAR model; Impulse response; Variance decomposition;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • 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

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