A Bayesian VAR Model Perspective on the Lagged Effect of Monetary Policy

RePEc Short ID: pcr107
ORCID iD: 0000-0002-7958-1818

Crump, Richard K.; Del Negro, Marco; Dogra, Keshav; Gundam, Pranay; Lee, Donggyu; Nallamotu, Ramya; Pacula, Brian

Discussion Paper

A Bayesian VAR Model Perspective on the Lagged Effect of Monetary Policy

Abstract: Over the last few years, the U.S. economy has experienced unusually high inflation and an unprecedented pace of monetary policy tightening. While inflation has fallen recently, it remains above target, and the economy continues to expand at a robust pace. Does the resilience of the U.S. economy imply that monetary policy has been ineffectual? Or does it reflect that policy acts with “long and variable lags” and so we haven’t yet observed the full effect of the monetary tightening that has already taken place? Using a Bayesian vector autoregressive (BVAR) model, we show that economic activity has, indeed, been substantially stronger than would have been anticipated considering the rapid policy tightening. Still, the model expects a significant slowdown in 2024-25, even though short-term interest rates are forecasted to fall.

Keywords: forecasts; lagged effects; monetary policy;

JEL Classification: E2; E52;