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

  • 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)

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

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 77.

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Length: 54 pages
Date of creation: 01 Feb 1999
Date of revision:
Publication status: Published in Journal of Applied Econometrics, 2001, pages 487-520.
Handle: RePEc:hhs:rbnkwp:0077
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page:

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  1. Perron, P, 1988. "The Great Crash, The Oil Price Shock And The Unit Root Hypothesis," Papers 338, Princeton, Department of Economics - Econometric Research Program.
  2. 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 933-41, November.
  3. 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.
  4. 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 363-81, July-Aug..
  5. Jon Faust & Eric M. Leeper, 1994. "When do long-run identifying restrictions give reliable results?," FRB Atlanta Working Paper 94-2, Federal Reserve Bank of Atlanta.
  6. Guy Debelle & Glenn Stevens, 1995. "Monetary Policy Goals for Inflation in Australia," RBA Research Discussion Papers rdp9503, Reserve Bank of Australia.
  7. 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.
  8. Julio 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.
  9. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, vol. 48(1), pages 1-48, January.
  10. Lars E. O. Svensson, 2000. "Open-Economy Inflation Targeting," NBER Working Papers 6545, 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 907-31, November.
  12. 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.
  13. Johansen, Soren, 1991. "Estimation and Hypothesis Testing of Cointegration Vectors in Gaussian Vector Autoregressive Models," Econometrica, Econometric Society, vol. 59(6), pages 1551-80, November.
  14. 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 644-52, June.
  15. 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.
  16. Vredin, Anders & Warne, Anders, 1991. " Current Account and Macroeconomic Fluctuations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 93(4), pages 511-30.
  17. Jacobson, Tor & Vredin, Anders & Warne, Anders, 1994. "Are Real Wages and Unemployment Related?," SSE/EFI Working Paper Series in Economics and Finance 8, Stockholm School of Economics.
  18. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
  19. 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 1387-93, December.
  20. 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.
  21. Johansen, Soren, 1995. "Likelihood-Based Inference in Cointegrated Vector Autoregressive Models," OUP Catalogue, Oxford University Press, number 9780198774501.
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