MEASURING MONETARY-POLICY WITH VAR MODELS - AN EVALUATION

This paper evaluates VAR models designed to analyse the monetary polic y transmission mechanism in the United States by considering three iss ues: specification, identification, and the effect of the omission of the long-term interest rate. Specification analysis suggests that only VAR models estimated on a single monetary regime feature parameters s tability and do not show signs of mis-specification. The identificatio n analysis shows that VAR-based monetary policy shocks and policy dist urbances identified from alternative sources are not highly correlated but yield similar descriptions of the monetary transmission mechanism . Lastly, the inclusion of the long-term interest rate in a benchmark VAR delivers a more precise estimation of the structural parameters ca pturing behaviour in the market for reserves and shows that contempora neous fluctuations in long-term interest rates are an important determ inant of the monetary authority's reaction function. (C) 1998 Elsevier Science B.V. All rights reserved.