The 'Price Puzzle', once more
Abstract
The VAR monetary literature has long exhibited a ‘price puzzle’: after
a positive innovation on the policy interest rate, the price level tends to
increase rather than to decrease. This paper shows that introducing fiscal
data (primary surplus and net debt) proves fruitful in a VAR model also
featuring the output gap, the inflation rate and the nominal short-term
interest rate: the ‘price puzzle’ vanishes.