American Economic Review: Vol. 99 No. 4 (September 2009)


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VAR Analysis and the Great Moderation

Article Citation

Benati, Luca, and Paolo Surico. 2009. "VAR Analysis and the Great Moderation." American Economic Review, 99(4): 1636-52.

DOI: 10.1257/aer.99.4.1636


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. (JEL C32, C52, E13, E52, N12)

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Benati, Luca (European Central Bank)
Surico, Paolo (Bank of England)

JEL Classifications

C32: Multiple or Simultaneous Equation Models: Time-Series Models; Dynamic Quantile Regressions
C52: Model Evaluation and Selection
E13: General Aggregative Models: Neoclassical
E52: Monetary Policy
N12: Economic History: Macroeconomics; Growth and Fluctuations: U.S.; Canada: 1913-

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