An alternative explanation of the prize puzzle

Arbeitspapier

This paper proposes a simple explanation for the frequent appearance of a price puzzle in VARs designed for monetary policy analysis. It suggests that the best method of solving the puzzle implies a close connection between theory and empirics rather than the introduction of a commodity price. It proves that the omission of a measure of output gap (or potential output) spuriously produces a price puzzle (and several other incorrect conclusions) in a wide class of commonly used models. This can happen even if the model admits a triangular identification and if the forecasts produced by the misspecified VAR are optimal. When the model is tested on US data, all predictions are supported.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: SSE/EFI Working Paper Series in Economics and Finance ; No. 414

Classification and Topics

• Classification: Wirtschaft ; Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) ; Monetary Policy
• Subject: Price puzzle ; monetary policy ; misspecification ; output gap ; potential output ; technology shocks ; VAR ; Geldpolitik ; Inflation ; Schock ; Gesamtwirtschaftliche Produktion ; VAR-Modell ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Giordani, Paolo
• Event: Veröffentlichung
• (who): Stockholm School of Economics, The Economic Research Institute (EFI)
• (where): Stockholm
• (when): 2001

Further information

• Handle: http://hdl.handle.net/10419/56084
• Last update: 10.03.2025, 11:44 AM CET