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How to Solve the Price Puzzle? A Meta‐Analysis
Author(s) -
RUSNAK MAREK,
HAVRANEK TOMAS,
HORVATH ROMAN
Publication year - 2013
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/j.1538-4616.2012.00561.x
Subject(s) - economics , openness to experience , monetary policy , commodity , independence (probability theory) , neglect , monetary economics , econometrics , impulse response , vector autoregression , point (geometry) , macroeconomics , finance , statistics , medicine , psychology , social psychology , mathematical analysis , mathematics , nursing , geometry
The short‐run increase in prices following an unexpected tightening of monetary policy constitutes a puzzle frequently reported in empirical studies. Yet the puzzle is easy to explain away when all published models are quantitatively reviewed. We collect and examine about 1,000 point estimates of impulse responses from 70 articles that use vector autoregressions to study monetary transmission in various countries. We find that the puzzle is created by model misspecifications: especially by the omission of commodity prices, neglect of potential output, and reliance on recursive identification. Our results also suggest that the strength of monetary policy depends on the country’s openness, phase of the economic cycle, and degree of central bank independence.