Monetary Policy Misspecification in VAR Models ∗

  title={Monetary Policy Misspecification in VAR Models ∗},
  author={Fabio Canova and Joaquim Pires Pina},
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… CONTINUE READING
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