Forward-Looking Monetary Policy and Anticipated Shocks to Inflation

31 Pages Posted: 13 Jun 2011 Last revised: 18 Jun 2011

See all articles by Pavel S. Kapinos

Pavel S. Kapinos

Federal Reserve Bank of Dallas--Financial Industry Studies

Date Written: April 1, 2011

Abstract

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

Kapinos, Pavel S., Forward-Looking Monetary Policy and Anticipated Shocks to Inflation (April 1, 2011). Available at SSRN: https://ssrn.com/abstract=1862343 or http://dx.doi.org/10.2139/ssrn.1862343

Pavel S. Kapinos (Contact Author)

Federal Reserve Bank of Dallas--Financial Industry Studies ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States

HOME PAGE: http://https://sites.google.com/site/pavelkapinos/

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