Empirical Economics

, Volume 46, Issue 2, pp 701–731

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

Authors

  • Selva Demiralp
    • Department of EconomicsKoç University
    • Department of EconomicsDuke University
    • Department of PhilosophyDuke University
  • Stephen J. Perez
    • Department of EconomicsCalifornia State University, Sacramento
Article

DOI: 10.1007/s00181-013-0694-5

Cite this article as:
Demiralp, S., Hoover, K.D. & Perez, S.J. Empir Econ (2014) 46: 701. doi:10.1007/s00181-013-0694-5

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 puzzleMonetary policyGraph theoryCausal search Output gapTransmission mechanism

JEL Classification

C32C51E32E44E51

Copyright information

© Springer-Verlag Berlin Heidelberg 2013