We explore two popular approaches to empirical analysis of monetary policy: the New Keynesian and the identified vector autoregression approaches. Stylized models of private behavior coupled with simple rules describing policy behavior characterize New Keynesian work. Vector autoregressions consist of minimally identified dynamic descriptions of private behavior coupled with a detailed rule for policy behavior. The simplicity of New Keynesian models aids in communication but leaves the models’ implications vulnerable. By relating the New Keynesian models to identified vector autoregressions, we explore the differences and similarities in the two approaches and assess some of the key conclusions to emerge from New Keynesian research.
JEL classification: E52, E47, C53
Key words: monetary policy, identification, New Keynesian, policy analysis, VAR
The authors thank Dan Waggoner for helpful comments. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Eric M. Leeper, Department of Economics, Indiana University, 304 Wylie Hall, 100 S. Woodlawn Avenue, Bloomington, Indiana 47405, 812-855-9157, 812-855-3736 (fax), firstname.lastname@example.org, or Tao Zha, Research Department, Federal Reserve Bank of Atlanta, 104 Marietta Street, N.W., Atlanta, Georgia 30303-2713, 404-498-8353, 404-498-8956 (fax), email@example.com.
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