Federal Reserve Bank of San Francisco
Working Papers in Applied Economic Theory
Do measures of monetary policy in a VAR make sense?
No. In many VARs, monetary policy shocks are identified with the least squares residuals from a regression of the federal funds rate on an assortment of variables. Such regressions appear to be structurally fragile and are at odds with other evidence on the nature of the Fed's reaction function; furthermore, the residuals from these regressions have little correlation with funds rate shocks that are derived from forward-looking financial markets.
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Glenn D. Rudebusch, Do measures of monetary policy in a VAR make sense?, Federal Reserve Bank of San Francisco, Working Papers in Applied Economic Theory 96-05, 1996.
Keywords: Vector autoregression ; Monetary policy - United States
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