Article

Empirical Economics

, Volume 46, Issue 2, pp 701-731

Still puzzling: evaluating the price puzzle in an empirically identified structural vector autoregression

  • Selva DemiralpAffiliated withDepartment of Economics, Koç University
  • , Kevin D. HooverAffiliated withDepartment of Economics, Duke UniversityDepartment of Philosophy, Duke University Email author 
  • , Stephen J. PerezAffiliated withDepartment of Economics, California State University, Sacramento

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Abstract

The price puzzle, an increase in the price level associated with a contractionary monetary shock, is investigated in a rich, 12-variable SVAR in which various factors that have been mooted as solutions are considered jointly. SVARs for the pre-1980 and post-1990 periods are identified empirically using a graph-theoretic causal search algorithm combined with formal tests of the implied overidentifying restrictions. In this SVAR, the pre-1980 price puzzle depends on the characterization of monetary policy, and the post-1990 price puzzle is statistically insignificant. Commonly suggested theoretical resolutions to the price puzzle are shown to have causal implications inconsistent with the data.

Keywords

Price puzzle Monetary policy Graph theory Causal search Output gap Transmission mechanism

JEL Classification

C32 C51 E32 E44 E51