Monetary Policy Misspecification in VAR Models

Fabio Canova, Joaquim Pires Pina
2000 Social Science Research Network  
We examine the consequences of extracting monetary policy disturbances in structural VARs identified with inertial restrictions two stochastic dynamic general equilibrium models featuring different types of sluggishness are used to generate the data. We find that, in general, misspecification is substantial: short run coefficients often have wrong signs; impulse responses and variance decompositions give misleading representations of the dynamics. Explanations for the results and suggestions
more » ... and suggestions for macroeconomic practice are provided.
doi:10.2139/ssrn.224529 fatcat:rekp43snr5dzjbws4q473mhpcy