VAR Analysis and the Great Moderation

Authors: Benati, Luca; Surico, Paolo

Source: The American Economic Review, Volume 99, Number 4, September 2009 , pp. 1636-1652(17)

Publisher: American Economic Association

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Abstract:

Most analyses of the US Great Moderation are based on structural VARs, and point toward good luck as the main explanation for the recent macroeconomic stability. Based on an estimated New-Keynesian model where the only source of change is the move from passive to active monetary policy, we show that (i) the theoretical VAR innovation variances for all series decrease across regimes; (ii) VAR-based counterfactuals assign a minor role to improved policy; and (iii) VAR impulse-response functions to a monetary shock exhibit little variation across regimes. Our analysis suggests that existing VAR evidence is also compatible with the "good policy" hypothesis.

Document Type: Short communication

DOI: http://dx.doi.org/10.1257/aer.99.4.1636

Publication date: 2009-09-01

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The American Economic Review is a general-interest economics journal. The journal is published quarterly and contains articles on a broad range of topics. Established in 1911, the AER is among the nation's oldest and most respected scholarly journals in the economics profession.
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