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The Price Puzzle: Fact or Artefact?

  • Philip Arestis

    ()

    (Department of Land Economics, University of Cambridge)

  • Michail Karoglou

    ()

    (Aston Business School, Aston University)

  • Kostas Mouratidis

    ()

    (Department of Economics, The University of Sheffield)

A conventional finding of recursive structural VAR (SVAR) analyses is the price puzzle namely the positive relationship between interest rates and inflation. We employ a Markov regime-switching structural VAR (MRS-SVAR) to investigate whether the price puzzle is present at regimes where there is violation of the Taylor principle. Our results suggest that the price puzzle is a regime-dependent phenomenon driven by passive monetary policy and Choleski identifying restrictions.

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File URL: http://www.shef.ac.uk/economics/research/serps/articles/2013_008.html
File Function: First version, 2013
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Paper provided by The University of Sheffield, Department of Economics in its series Working Papers with number 2013008.

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Length: 10 pages
Date of creation: 2013
Date of revision:
Handle: RePEc:shf:wpaper:2013008
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  1. Benati, Luca & Surico, Paolo, 2008. "VAR analysis and the Great Moderation," Working Paper Series 0866, European Central Bank.
  2. Fabio Canova & Gianni De Nicolo, 2000. "Monetary disturbances matter for business fluctuations in the G-7," International Finance Discussion Papers 660, Board of Governors of the Federal Reserve System (U.S.).
  3. Troy Davig & Eric M. Leeper, 2006. "Generalizing the Taylor Principle," Caepr Working Papers 2006-001, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  4. Efrem Castelnuovo & Paolo Surico, 2010. "Monetary Policy, Inflation Expectations and The Price Puzzle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1262-1283, December.
  5. Carlstrom, Charles T. & Fuerst, Timothy S. & Paustian, Matthias, 2009. "Monetary policy shocks, Choleski identification, and DNK models," Journal of Monetary Economics, Elsevier, vol. 56(7), pages 1014-1021, October.
  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.
  7. Roger E. A. Farmer & Daniel F. Waggoner & Tao Zha, 2008. "Minimal state variable solutions to Markov-switching rational expectations models," FRB Atlanta Working Paper 2008-23, Federal Reserve Bank of Atlanta.
  8. Luca Benati, 2008. "The "Great Moderation" in the United Kingdom," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 40(1), pages 121-147, 02.
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