Comment on Glenn Rudebusch's "Do measures of monetary policy in a VAR make sense?"

Article Abstract:

Glenn Rudebusch's analysis of monetary policy in a vector autoregression (VAR) raises doubts about the insufficiency of existing models on monetary policy and money supply. His emphasis on the predictive value of financial market variables that is not captured in the usual list of VAR variables underscores the need for detailed modeling of monetary policy and money supply. A full scale dynamic model, where policy shocks have been isolated and where the link between private-sector based disturbances to market rates and funds and discount rate setting has been established, is proposed.

Models

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Do measures of monetary policy in a VAR make sense? A reply to Christopher A. Sims

Article Abstract:

Many modelers of vector autoregression (VAR) and its relation to monetary policy have mistakenly proposed models whose methodologies are flawed as they were based on ocular judgments on impulse responses rather than on statistical tests. Being a structural reaction function, a VAR interest rate equation must then be subjected to statistical testing and econometric analysis. Meanwhile, monetary shocks can be compared with financial market stocks, across VARs. Thus, measures of monetary policy in commonly estimated VARs do not make sense.

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Comment and discussion

Article Abstract:

J. Bradford DeLong claims that deflation is more dangerous than inflation. However, the negative consequences of inflation and deflation are in some ways similar. It should be noted that hyperinflations and depressions that have occurred in the past have similar negative consequences. Deflation is worse than inflation when the real rate of return will shift and cause a previously sustainable deflation rate to be disruptive.

Inflation (Finance), Inflation (Economics), Deflation (Finance), Deflation (Economics)

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