Forward-Looking Monetary Policy and Anticipated Shocks to Inflation
31 Pages Posted: 13 Jun 2011 Last revised: 18 Jun 2011
Date Written: April 1, 2011
This paper extends a standard New Keynesian model to describe the effects of anticipated shocks to inflation and forward-looking monetary policy. Using the data generated from this modified model suggests that overlooking these two factors in the standard Cholesky structural vector autoregressive identification scheme will generate a price puzzle. Furthermore, this paper demonstrates that failing to account for these two factors may result in significant estimates of two other explanations of the price puzzle – the cost channel of transmission of monetary policy and indeterminacy due to violation of the Taylor principle – even though neither features in the data generating process.
Keywords: New Keynesian Model, Price Puzzle, Cost Channel, Indeterminacy, Monetary Policy, Anticipated Shocks, Forecast-Based Rules
JEL Classification: E31, E32, E52
Suggested Citation: Suggested Citation