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Anticipatory Monetary Policy and the 'Price Puzzle'

Author

Listed:
  • James Bishop

    (Reserve Bank of Australia)

  • Peter Tulip

    (Reserve Bank of Australia)

Abstract

Vector autoregression (VAR) models often find that inflation increases in response to a tightening in monetary policy, although standard macroeconomics predicts the opposite. This 'price puzzle' is commonly thought to reflect interest rates being tightened in anticipation of future inflation, reflecting information possessed by policymakers beyond that contained in the model. Romer and Romer (2004) and Cloyne and Hürtgen (2016) successfully remove the price puzzle from US and UK data, respectively, by purging the cash rate of systematic policy responses to central bank forecasts. We find that this approach does not work for Australia under a wide range of specifications. This suggests that VARs may not be the most reliable way to analyse monetary policy.

Suggested Citation

  • James Bishop & Peter Tulip, 2017. "Anticipatory Monetary Policy and the 'Price Puzzle'," RBA Research Discussion Papers rdp2017-02, Reserve Bank of Australia.
  • Handle: RePEc:rba:rbardp:rdp2017-02
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    References listed on IDEAS

    as
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    5. Efrem Castelnuovo, 2012. "Testing the Structural Interpretation of the Price Puzzle with a Cost-Channel Model," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 74(3), pages 425-452, June.
    6. Sims, Christopher A., 1992. "Interpreting the macroeconomic time series facts : The effects of monetary policy," European Economic Review, Elsevier, vol. 36(5), pages 975-1000, June.
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    8. James Cloyne & Patrick Hürtgen, 2016. "The Macroeconomic Effects of Monetary Policy: A New Measure for the United Kingdom," American Economic Journal: Macroeconomics, American Economic Association, vol. 8(4), pages 75-102, October.
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    More about this item

    Keywords

    price puzzle; monetary policy; VARs;

    JEL classification:

    • 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

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