Abstract

The short-run increase in prices following an unexpected tightening of monetary policy constitutes a puzzle frequently reported in empirical studies. Yet the puzzle is easy to explain away when all published models are quantitatively reviewed. We collect and examine about 1,000 point estimates of impulse responses from 70 articles that use vector autoregressions to study monetary transmission in various countries. We find that the puzzle is created by model misspecifications: especially by the omission of commodity prices, neglect of potential output, and reliance on recursive identification. Our results also suggest that the strength of monetary policy depends on the country's openness, phase of the economic cycle, and degree of central bank independence.

suggested citation: Marek Rusnak, Tomas Havranek, & Roman Horvath (2013), "How to Solve the Price Puzzle? A Meta-Analysis." Journal of Money, Credit and Banking 45(1), 37-70.

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Headline result

The price puzzle (prices rising after monetary tightening): it disappears once publication and misspecification biases are corrected, and prices fall instead, bottoming out 0.33% below baseline six months after a 1-percentage-point rate rise, based on about 1,000 estimates from 70 studies (Rusnak et al. 2013, Journal of Money, Credit and Banking).

How to cite

Marek Rusnak, Tomas Havranek, & Roman Horvath (2013), "How to Solve the Price Puzzle? A Meta-Analysis." Journal of Money, Credit and Banking 45(1), 37-70.

BibTeX 
@article{rusnak2013price_puzzle,
  author  = {Marek Rusnak and Tomas Havranek and Roman Horvath},
  title   = {How to Solve the Price Puzzle? A Meta-Analysis},
  journal = {Journal of Money, Credit and Banking},
  year    = {2013},
  doi     = {10.1111/j.1538-4616.2012.00561.x},
}