Abstract
In this paper we expand the well-known methodology of deriving cross spectra from autoregressive lag models to the class of time-varying parameter models. That enables us to analyse all frequency properties at all points in time (in contrast to the wavelet methodology, where one can only analyse certain frequencies at all points in time). This allows us to separate the evolution of an equilibrium from dynamic adjustments to it and the process of learning about it. Using these results, we analyse the behaviour of short terni interest rates in response to monetary policy changes in Britain during and following the European Exchange Rate Mechanism (ERM) crisis of 1992/3. We hod that the British monetary transmission mechanisms is very stable even in an event like the ERM crisis. This is possible due to the adjustment of the risk premium.
Financial Support from the Austrian Science Foundation (project no P12745-OEK) is gratefully acknowledged.
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Hallett, A.H., Richter, C.R. (2004). Learning and Monetary Policy in a Spectral Analysis Representation. In: Chen, SH., Wang, P.P. (eds) Computational Intelligence in Economics and Finance. Advanced Information Processing. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-662-06373-6_21
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DOI: https://doi.org/10.1007/978-3-662-06373-6_21
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