Fabio C. Bagliano
Dipartimento di Scienze Economiche e Finanziarie, Università di Torino

Carlo A. Favero
IGIER - Università Commerciale "Luigi Bocconi" (Milano) and CEPR (London)

                                European Economic Review, vol.42, 6, 1998, p.1069-1112

This paper evaluates VAR models designed to analyze the monetary policy transmission mechanism in the United States by considering three issues: specification, identification, and the effect of the omission of the long-term interest rate. Specification analysis suggests that only VAR models estimated on a single monetary regime feature parameters stability and do not show signs of mis-spefication. The identification analysis shows that VAR-based monetary policy shocks and policy disturbances identified from alternative sources are not highly correlated but yield similar descriptions of the monetary transmission mechanism. Lastly, the inclusion of the long-term interest rate in a benchmark VAR delivers a more precise estimation of the structural parameters capturing behaviour in the market for reserves and shows that contemporaneous fluctuations in long-term interest rates are an important determinant of the monetary authority's reaction function.

J.E.L. classification numbers: E44, E52
Keywords: monetary transmission, VAR models                                                                      Download WP PDF (1055 kb)