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Anticipatory Monetary Policy and the 'Price Puzzle'

Author

Listed:
  • James Bishop

    (Reserve Bank of Australia)

  • Peter Tulip

    (Reserve Bank of Australia)

Abstract
Vector autoregression (VAR) models 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 policymakers 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.

Suggested Citation

  • James Bishop & Peter Tulip, 2017. "Anticipatory Monetary Policy and the 'Price Puzzle'," RBA Research Discussion Papers rdp2017-02, Reserve Bank of Australia.
    • Handle: RePEc:rba:rbardp:rdp2017-02
    as

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    File URL: https://www.rba.gov.au/publications/rdp/2017/pdf/rdp2017-02.pdf
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    References listed on IDEAS

    as
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    Cited by:

    1. Mandel, Antoine & Veetil, Vipin P., 2021. "Monetary dynamics in a network economy," Journal of Economic Dynamics and Control, Elsevier, vol. 125(C).
    2. Benjamin Beckers, 2020. "Credit Spreads, Monetary Policy and the Price Puzzle," RBA Research Discussion Papers rdp2020-01, Reserve Bank of Australia.
    3. Luke Hartigan & James Morley, 2020. "A Factor Model Analysis of the Australian Economy and the Effects of Inflation Targeting," The Economic Record, The Economic Society of Australia, vol. 96(314), pages 271-293, September.
    4. Luke Hartigan & James Morley, 2018. "A Factor Model Analysis of the Effects on Inflation Targeting on the Australian Economy," RBA Annual Conference Volume (Discontinued), in: John Simon & Maxwell Sutton (ed.),Central Bank Frameworks: Evolution or Revolution?, Reserve Bank of Australia.
    5. Zhengyang Chen, 2019. "The Long-term Rate and Interest Rate Volatility in Monetary Policy Transmission," 2019 Papers pch1858, Job Market Papers.
    6. Kieren Jackson, 2024. "Monetary policy and wealth inequality," Australian Economic Papers, Wiley Blackwell, vol. 63(S1), pages 3-12, May.
    7. Calvin He & Gianni La Cava, 2020. "The Distributional Effects of Monetary Policy: Evidence from Local Housing Markets," RBA Research Discussion Papers rdp2020-02, Reserve Bank of Australia.

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    More about this item

    Keywords

    price puzzle; monetary policy; VARs;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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