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

  • Soren Johansen

    (European University Institute, Florence)

  • Katarina Juselius

    (Institute of Economics, University of Copenhagen)

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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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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