Anticipatory Monetary Policy and the Price Puzzle

Reserve Bank of Australia, RDP 2017-02

35 Pages Posted: 22 May 2017

See all articles by Peter Tulip

Peter Tulip

Reserve Bank of Australia

James Bishop

Reserve Bank of Australia

Date Written: May 22, 2017

Abstract

Vector Autoregressions often find that inflation increases in response to a tightening in monetary policy, although standard macroeconomics predicts the opposite. This ‘price puzzle’ is commonly thought to reflect interest rates being tightened in anticipation of future inflation, reflecting information possessed by policy-makers beyond that contained in the model. Romer and Romer (2004) and Cloyne and Hürtgen (2016) successfully remove the price puzzle from US and UK data respectively by purging the cash rate of systematic policy responses to central bank forecasts. We find that this approach does not work for Australia under a wide range of specifications. This suggests that VARs may not be the most reliable way to analyse monetary policy.

Keywords: price puzzle, monetary policy, Vector Autoregressions

JEL Classification: E31, E52

Suggested Citation

Tulip, Peter and Bishop, James, Anticipatory Monetary Policy and the Price Puzzle (May 22, 2017). Reserve Bank of Australia, RDP 2017-02. Available at SSRN: https://ssrn.com/abstract=2971775 or http://dx.doi.org/10.2139/ssrn.2971775

Peter Tulip (Contact Author)

Reserve Bank of Australia ( email )

GPO Box 3947
Sydney, NSW 2001
Australia
61-2-9551-8831 (Phone)

HOME PAGE: http://www.petertulip.com

James Bishop

Reserve Bank of Australia ( email )

GPO Box 3947
Sydney, NSW 2001
Australia

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