`@| _L |i V+t 4i@?q i@th?

} |i |T|
,giU|t Lu L?i|@h) L*U)
Joln H. Coclranc

Jnly , 997
Devwudfw
YDUv ghvfuleh wkh klvwru| ri rxwsxw dqg rwkhu yduldeohv iroorzlqj prqhwdu|
vkrfnv1 Wr phdvxuh ri wkh hhfwv ri prqhwdu| vkrfnv/ rqh pxvw dgg hfrqrplf lghq0
wli|lqj dvvxpswlrqv1 L vshfli| wkh uhodwlyh hhfwv ri dqwlflsdwhg dqg xqdqwlflsdwhg
prqh|/ dqg L fdofxodwh krz YDU0edvhg phdvxuhv ri wkh hhfw ri prqh| rq rxwsxw
fkdqjh dv rqh ydulhv wklv dvvxpswlrq1
Wkh dqwlflsdwhg2xqdqwlflsdwhg dvvxpswlrq lqxhqfhv phdvxuhg rxwsxw hhfwv dv
pxfk ru pruh wkdq wkh yduldeoh vhohfwlrq dqg vkrfn ruwkrjrqdol}dwlrq dvvxpswlrqv
rq zklfk wkh YDU olwhudwxuh irfxvhv1 Dvvxplqj wkdw dqwlflsdwhg prqhwdu| srolf|
fdq kdyh vrph hhfw rq rxwsxw uhvxowv lq pxfk vkruwhu/ vpdoohu/ dqg shukdsv pruh
eholhydeoh hvwlpdwhv ri wkh rxwsxw uhvsrqvh wr prqhwdu| vkrfnv1
MHO Frghv= H85/F65/F85
Nh|zrugv= Prqhwdu| srolf|/ yhfwru dxwruhjuhvvlrq/ lghqwlfdwlrq1

Xqlyhuvlw| ri Fklfdjr/ Ihghudo Uhvhuyh Edqn ri Fklfdjr dqg QEHU1 Dgguhvv= Judgxdwh
Vfkrro ri Exvlqhvv/ Xqlyhuvlw| ri Fklfdjr/ 4434 H1 8;wk Vw1/ Fklfdjr LO 9396:/ ::6 :35 638</
mrkq1frfkudqhCjve1xfklfdjr1hgx/ id{ ::6 :35 378;1 L wkdqn Oduu| Fkulvwldqr/ Wlp Frjoh|/ Pduwlq Hlfkhq0
edxp/ Oduv Kdqvhq/ Dqlo Ndvk|ds/ Fkduohv Sorvvhu/ Wrp Vdujhqw/ Nhq Zhvw dqg hvshfldoo| Pdun Zdwvrq/
Plnh Zrrgirug dqg dq dqrq|prxv uhihuhh iru khosixo frpphqwv/ dqg L wkdqnDoh{dqghu Uh|ipdq iru uh0
vhdufk dvvlvwdqfh1 Wklv uhvhdufk zdv vxssruwhg e| d judqw iurp wkh QVI dgplqlvwhuhg e| wkh QEHU/ dqg
e| wkh Xqlyhuvlw| ri Fklfdjr Judgxdwh Vfkrro ri Exvlqhvv1

W?|hL_U|L?
Wlai arc ilc rcal cnccis ol monciary policy A lngc rcccni liicrainrc las rcinrnco io
ilis classic qncsiion, ano las mcasnrco ilc lisiory ol rcal ano nominal varialcs lollowing
monciary slocks.

Ly ilinking carclnlly aoni low io iocniily monciary policy slocks (or,

a criiic migli clargc, y cxicnsivc sling), ilis liicrainrc las ai lasi prooncco impnlsc-
rcsponsc lnnciions ilai capinrc common vicws aoni monciary policy.
[Inscri Fignrc lcrc[
Fignrc prcscnis iwo cxamplcs, iakcn lrom Coclranc (994a) wlicl snrvcys ilis
liicrainrc. (Jlc spccicaiion ano csiimaiion ol ilcsc VAIs is ocscrico in ilc Appcnoix.)
Jlc iop row prcscnis rcsponscs io a onc sianoaro ocviaiion 2 slock. An nncxpccico risc
in 2 is lollowco y a proiracico risc in 2. Jlc lcocral lnnos raic rcsponos wiil an iniiial
occlinc ano ilcn a proiracico risc. Jlis rcsponsc can c inicrprcico as a liqnioiiy cncci
lollowco y an innaiion cncci. Consnmpiion ano onipni risc icmporarily, ano priccs
risc. Jlc long-rnn consnmpiion ano onipni cnccis arc mncl lcss ilan onc sianoaro crror
lrom zcro. In ilc oiiom row, lcocral lnnos raic innovaiions arc nsco io iocniily moncy
snpply slocks. In rcsponsc io a snrprisc incrcasc in ilc lcocral lnnos raic, consnmpiion
ano onipni occlinc icmporarily, priccs occlinc, ano occlincs. Jlc lcocral lnnos raic
also siays ligl lor qniic somc iimc alicr ilc iniiial slock.
Jlc gcncral paiicrns in Fignrc arc jnsi wlai Fricoman (908) iangli ns io cxpcci.
Howcvcr, ilc magniinocs arc a ii snrprising. Jlc onipni rcsponscs arc proiracico,
lnmp-slapco ano largc. Onipni pcaks iwo )i@ht alicr ilc slock, ano iakcs vc ycars
4
Vhh dprqj pdq| rwkhuv Ehuqdqnh dqg Eolqghu +4<;;,/ Fkulvwldqr dqg Hlfkhqedxp +4<<4,/ Fkulvwldqr/
Hlfkhqedxp dqg Hydqv +4<<7,/ Hlfkhqedxp dqg Hydqv +4<<5d,/ Jrugrq dqg Ohhshu +4<<6,/ Vlpv +4<<5,
dqg Vwurqjlq +4<<5, lq wkh YDU wudglwlrq/ dqg Urphu dqg Urphu +4<<7, iru dq hvwlpdwh edvhg rq uhdglqj
wkh IRPF plqxwhv wr lghqwli| prqh| vxsso| vkrfnv1
2
io oic oni. Onipni riscs y aoni 0./ lollowing a onc-sianoaro ocviaiion slock, wlicl
is also aoni 0./: sincc 2 is mncl smallcr ilan onipni, ano ilc asc is again mncl
smallcr ilan 2, ilis rcsponsc implics a largc amplicaiion in oollar icrms. Ano I sclccico
ilcsc spccicaiions in pari io minimizc ilc sizc ano lcngil ol onipni rcsponscs. Simplcr
spccicaiions (2, onipni ano pricc lcvcl lor cxamplc) prooncc cvcn largcr ano morc
proiracico rcsponscs.
Jlcsc impnlsc-rcsponsc lnnciions capinrc t|Lh), ilc avcragc valncs ol moncy, onipni,
inicrcsi raics ano oilcr varialcs lollowing a moncy snpply slock. Wlai oocs ilis t|Lh)
icll ns aoni ilc igiU|t ol monciary policy Wlai oocs ii icll ns, lor cxamplc, aoni
ilc conrsc ol cvcnis wc slonlo cxpcci il ilcrc is a monciary slock ?L| lollowco y ilc
cnsiomary lnrilcr cxpansion ol moncy Ini anoilcr way, low imporiani is ilc proviso,
wiocly ncglccico in ilc VAI liicrainrc, ilai ilc VAI mcasnrcs ilc cnccis ol policy
slocks, L?*) il ilcy arc lollowco y ilc cnsiomary lnrilcr policy aciions Wlai oocs
ilis lisiory icll ns aoni monciary |iLh), aoni wlicl kinos ol monciary moocls onc
nccos io consirnci in orocr io nnocrsiano ano gnioc monciary policy In pariicnlar, oo
ilc rcsponscs mcan ilai wc mnsi consirnci monciary ilcorics wiil imporiani oclay ano
propagaiion mcclanisms
Ii is icmpiing io ilink ilai, oncc monciary policy slocks arc corrccily iocniico,
ilc impnlsc-rcsponsc lnnciions provioc oircci answcrs io ilcsc qncsiions, oircci mcasnrcs
ol ilc cnccis ol monciary policy. Jlc cxicnsivc cconomic inicrprciaiions ol impnlsc-
rcsponsc lnnciions in ilc VAI liicrainrc can casily lcavc rcaocrs wiil ilis imprcssion.
Lni Sargcni`s (970) Oscrvaiional cqnivalcncc warns ns ilai many oincrcni ilcorics
ol ilc igiU|t ol monciary policy arc in laci consisicni wiil ilc t|Lh) ol monciary policy
as capinrco y a VAI, cvcn il ilc slocks arc corrccily iocniico. A lnrilcr, ilcorciical,
iocniicaiion is ncccssary io mcasnrc ilc cnccis ol monciary policy.
3
[Inscri gnrc 2 lcrc[
Jo c spccic, locns on ilc moncy$moncy ano moncy$onipni rcsponscs ploiico
iogcilcr in Fignrc 2. Il only nnaniicipaico monciary slocks can ancci onipni, ilc onipni
rcsponsc oocs mcasnrc ilc oynamic cncci ol ilc iniiial monciary slock. Ircciscly, in ilis
casc ilc onipni rcsponsc is policy invariani: A moncy slock will lavc ilis cncci on
onipni in any rcgimc, or no maiicr wlai ilc pail ol moncy lollowing ilc slock.
Lni snpposc insicao ilai @?|UT@|i_ monciary slocks can also ancci onipni. Now,
ilc coniinnco cxpansion ol moncy ilai is cxpccico io lollow a slock can, i? | @TTi?tc
cansc ilc prolongco cxpansion ol onipni lollowing ilc slock. Jlc igiU|t ol a monciary
policy slock on onipni, i.c. ilc policy-invariani qnaniiiy, or ilc pail ol onipni lollowing
a slock ilai is noi lollowco y ilc laiinal lnrilcr cxpansion ol moncy, may c in laci
small, slori ano occaying (railcr ilan lnmp-slapco). Il a moocl proonccs aniicipaico
moncy cnccis, ii may noi rcqnirc amplicaiion ano oclay mcclanisms io c consisicni
wiil ilc oaia.
Ol conrsc, onc wanis nnmcrs or grapls: csiimaics noi siorics. Lxacily wlai mcasnrc
ol ilc cnccis ol monciary policy oocs onc gci lrom assnming ilai aniicipaico moncy can
maiicr How slori ano small arc ilc irnc rcsponsc lnnciions in ilis casc In ilc ooy
ol ilis papcr, I aoopi alicrnaiivc cxplicii iocniilying assnmpiions in wlicl aniicipaico
moncy can lavc somc cncci on onipni. From ilc csiimaico impnlsc-rcsponsc lnnciions,
I calcnlaic csiimaics ol ilc cncci ol moncy on onipni nnocr ilc alicrnaiivc iocniilying
assnmpiions. I no ilai ilc csiimaico onipni rcsponscs vary a loi as onc clangcs iocniily-
ing assnmpiion. Jlc aniicipaico-nnaniicipaico iocniilying assnmpiion is as imporiani io
ilc onipni cncci mcasnrcs as ilc varialc sclcciion ano orilogonalizaiion assnmpiions on
wlicl ilc VAI liicrainrc locnscs. I also no ilai ilc aniicipaico moncy moocls oo rcsnli
4
in onipni cncci csiimaics ilai arc mncl sloricr ano smallcr ilan ilc impnlsc-rcsponsc
lnnciion.
Jlc poini ano coniriniion ol ilis papcr is wlai io oo wiil impnlsc rcsponsc lnnciions
alicr ilcy lavc ccn csiimaico. Jlcrclorc, I nsc a lairly sianoaro spccicaiion ano oo noi
locns on ilc varialc sclcciion, spccicaiion, ano orilogonalizaiion issncs on wlicl ilc
VAI liicrainrc riglily locnscs. Jlc ccniral gcncral paiicrn ol corrcci signs, pcrsisicni
policy, ano pcrsisicni rcsponscs io slocks is noi ai all scnsiiivc io ilc ociails ol spcci-
caiion, ano is common io almosi all ilc monciary VAIs in ilc liicrainrc. Jlcrclorc, ilc
qnaliiaiivc rcsnlis apply io mosi ol ilai liicrainrc.
,TiU|i_ 4L?i)q
Slonlo an cmpiricisi cvcn consiocr ilc possiiliiy ilai aniicipaico monciary can lavc
rcal cnccis Lncas (972, 973, ano in a lorcclnl snmmary, 990) says no. In Lncas` moocl,
only ?iTiU|i_ monciary policy slocks can lavc rcal cnccis. Lncas` vicw is aiiraciivc,
sincc ii can cxplain ilc laci ilai monciary policy somciimcs sccms io lavc largc onipni
cnccis ni ai oilcr iimcs sccms io lavc small or no cnccis. Jlc cxpcricncc ol 980-82
is olicn sccn as a classic cxamplc ol a largc cncci. Jlc ocaic ovcr ilc grcai ocprcssion
sccms now io c ovcr L monciary policy cansco ilc ocprcssion railcr ilan i|ih
ii oio so. Lni in ilc cnos ol lypcrinnaiions (Sargcni 980) ano cnrrcncy rcvalnaiions,
moncy growil or iis siock can clangc y laciors ol ilonsanos, liicrally ovcrnigli, wiil
no rcal cncci ai all.
Lncas` rcconciliaiion ol ilcsc oincrcni rcgimcs las a oramaiic implicaiion: t)t|i4@|U
monciary policicspolicics iakcn prcoicialy y ccniral anks io onsci rcccssionslavc
no rcal cnccis, a poini maoc lorcclnlly y Sargcni ano Wallacc (97). Jlis implicaiion
may lclp io cxplain ilc oimcnliics ilai ccniral anks lavc lacco in nc inning onipni or

cxclangc raics y irying io sysicmaiically onsci rcal slocks.

Howcvcr, Lncas` vicw las noi ccn nnivcrsally acccpico. any anilors siaic or rcvcal
vicws ilai aniicipaico moncy las rcal cnccis or (cqnivalcnily) ilai sysicmaiic policy
maiicrs. For cxamplc, Iomcr ano Iomcr (994) claim ilai sysicmaiic monciary policy
cnoco posiwar rcccssions. Jlc argnmcni againsi cnrrcncy nnions ano xco cxclangc raics
is ilai ilcy prcvcni naiional govcrnmcnis lrom pnrsning sysicmaiic monciary policy io
onsci conniry-spccic rcal slocks. Jlc liicrainrc ilai cvalnaics nominal GNI iargciing
(Fclosicin ano Siock 994, Hall ano ankiw 994 arc rcccni cxamplcs) is prcoicaico on
ilc ioca ilai ciicr sysicmaiic policics can rconcc ilc variancc ol onipni.
onciary ilcorisis lavc also consirncico moocls in wlicl aniicipaico monciary slocks
can lavc rcal cnccis. Ovcrlapping coniraci moocls (Jaylor 979), siicky pricc moocls (lor
cxamplc, Ioicmcrg 982, 994 scc also Llanclaro 990 lor a rcvicw wiil rclcrcnccs),
limiico pariicipaiion moocls (Grossman ano Wciss 983, Ioicmcrg 984, morc rcccnily
Alvarcz ano Aikcson 990) arc primc cxamplcs. Lvcn Lncas` (972) moocl can gcncraic
cnccis ol aniicipaico moncy il moncy is noi injccico y proporiional iranslcr. In Lncas
ano Siokcy`s (983) casl in aovancc moocl only @?|UT@|i_ monciary policy las rcal,
innaiion-iax, cnccis (ilongl aomiiicoly ol ilc wrong sign). Casl-in-aovancc moocls
wiil aojnsimcni cosis (Fncrsi 992, Clrisiiano ano Liclcnanm 992, 99 ) prooncc
morc iraoiiional rcal cnccis ol aniicipaico ano nnaniicipaico moncy.
For ilcsc rcasons, ii sccms ilai an cmpiricisi slonlo ai lcasi consiocr ilc possiiliiy
ilai aniicipaico monciary clangcs can lavc rcal cnccis, railcr ilan rnling sncl a vicw
oni @ ThLh.
0
2 L_i*t Lu |i @?|UT@|i_%?@?|UT@|i_ tT*|
2 ihi
I spccily iwo simplc moocls lor ilc rclaiion ciwccn moncy ano onipni ilai capinrc
aniicipaico moncy cnccis. Jlc rsi moocl allows cxpccico ano nncxpccico moncy io
ancci onipni. Ii is
+
|
= @
W
(u) [b6
|
( b) (6
|
.
|3
6
|
)[ K
W
(u) B
|

Asicrisks on @
W
(u) ano K
W
(u) ocnoic sirncinral lag polynomials. b is a prcspccico para-
mcicr ilai varics ciwccn 0 ano . K
W
(u) B
|
capinrcs non-monciary onipni oisinranccs.
As b $0 ilis moocl spccics ilai only nnaniicipaico moncy maiicrs. As b $ ilcrc is
no oincrcncc ciwccn aniicipaico ano nnaniicipaico moncy.
Jlc sccono moocl is a sligli mooicaiion ol a sianoaro siicky-pricc moocl (Ioicmcrg
982, 994),
+
|
= @
W
(u)
%
6
|

k
ku
.
|3
#
kq
kqu
3
6
|
$&
K
W
(u) B
|

q is a oisconni lacior, sliglily lcss ilan , ano k ciwccn 0 ano mcasnrcs ilc cosis
ol pricc aojnsimcni. Jlc siicky pricc-moocl capinrcs ilc ioca ilai priccs ano lcncc
onipni rcspono io cxpccico lninrc moncy. Jlc oisirinico *i@_ ol lninrc moncy lollowing
ilc cxpcciaiion capinrcs ilis cncci, ascni lrom ilc rsi moocl. As ilc pricc-siickincss
paramcicr k $0, ilis moocl also rconccs io ilc nncxpccico moncy moocl (b = 0), ano
as k $ ii rconccs io ilc mcclanisiic moocl (b = ). Ii givcs a moocl in ciwccn ilcsc
iwo cxircmcs ilai is morc complicaico ni somcwlai morc gronnoco in cconomic ilcory
ilan ilc rsi moocl.
I assnmc ilai ilcsc rclaiions ciwccn moncy ano onipni arc invariani io ilc policy
rcgimc: oncc wc lavc csiimaico ilc paramcicrs @
W
(u), wc can calcnlaic ilc rcsponsc ol
7
onipni io ariirary monciary cxpcrimcnis. Lncas (970) argnco ilai a gooo sonrcc
ni noi ilc only sonrccol policy-invariani rclaiions arc rclaiions carclnlly gronnoco in
cconomic ilcory. Loil ol ilc aovc moocls lavc somc gronnoing in cconomic ilcory, ni
ilc oynamics @
W
(u) arc ao-loc. Jlc moocls arc inicnoco as a ncxilc yci prccisc way
ol capinring casily-inicrprcialc aniicipaico-nnaniicipaico oisiinciions, as lonno in many
morc lormal moocls ano oiscnssions ol monciary policy.
In ilc rcmainocr ol ilis scciion, I ocvclop ano moiivaic ilcsc moocls, ano I slow low
io iocniily ilc paramcicrs @
W
(u) lrom ilc impnlsc rcsponsc lnnciion.
22 ?|UT@|i_?@?|UT@|i_ 4L_i*
L_i*
Firsi, snpposc ilai only nnaniicipaico moncy anccis onipni. Jlc sianoaro moocl (as,
lor cxamplc, in Sargcni`s 987 icxiook) is a variani ol Lncas (973),
+
|
= w (6
|
.
|3
6
|
) ()
Ol conrsc, cvcn ilis rcprcscniaiion is noi sirncinral or policy invariani. (Jlai is ilc poini
ol Lncas` 973 papcr.) Jlc paramcicr w ocpcnos on ilc rclaiivc variancc ol aggrcgaic
ano ioiosyncraiic pricc slocks. Howcvcr, rcgimc clangcs ilai oo noi alicr ilis raiio will
lcavc w nnclangco, so wc can ai lcasi cvalnaic a limiico sci ol rcgimc clangcs.
Jlis simplc moocl oocs noi allow lor scrially corrclaico onipni. Jlcrclorc, cmpirical
spccicaiions allow laggco cnccis ol monciary slocks ano scrially corrclaico non-monciary
onipni oisinranccs. Jlns, I siari wiil ilc moocl
+
|
= @
W
(u) [6
|
.
|3
6
|
[ K
W
(u) B
|
(2)
I assnmc ilai ilc non-monciary slocks B
|
arc orilogonal io monciary slocks [6
|
.
|3
6
|
[.
8
Sccono, snpposc ilcrc is no oisiinciion ciwccn aniicipaico ano nnaniicipaico moncy,
so onr sirncinral vicw is
+
|
= @
W
(u) 6
|
K
W
(u) B
|

Jypically onc lopcs or imposcs ilai @

W
() = 0, so ilai ilc lcvcl ol moncy las no long-rnn
cncci on onipni.
Onc may again complain aoni micro-lonnoaiions. Howcvcr, ilis is a moocl wiil a
grcai lisiorical iraoiiion in cmpirical work, lrom ilc Si. Lois Fco rcgrcssions (Anocrson
ano Joroan 908) ano iis many anicccocnis io ilc oynamic mnliiplicrs calcnlaico y
Iomcr ano Iomcr (994). osi imporianily, ilis moocl is implicii in any oiscnssion ilai
oocs noi cxpliciily oisiingnisl cnccis ol aniicipaico vs. nnaniicipaico monciary policy.
Sincc almosi no policy oiscnssions makc ilis oisiinciion, cvcn among acaocmics, ii sccms
woril inicrprciing ilc oaia wiil ilis vicw.
Finally, wc wani a moocl ilai assnmcs ilai aniicipaico moncy can lavc somc cncci,
ilongl nnaniicipaico moncy migli lavc sirongcr cnccis. As a way io capinrc ilis ioca
2
,
5
Pdq| rwkhu vfkhphv duh srvvleoh1 Rqh pljkw wu| wr doorz vhsdudwh g|qdplf hhfwv ri dqwlflsdwhg dqg
xqdqwlflsdwhg prqh|/
|
w
@ d

d
+O, p
w
.d

x
+O, +p
w
H
w4
p
w
, .e

+O,
w
=
Dodv/ d

d
dqg d

x
duh qrw vhsdudwho| lghqwlhg1 +Vhh Frfkudqh 4<<7e iru d surri lq wklv vshflf fdvh>
wklv lv wkh srlqw ri Vdujhqw 4<:9 pruh jhqhudoo|1, Wkh prgho lq wkh wh{w dggv wr wklv vshflfdwlrq dq
dg0krf dvvxpswlrq wkdw vkdsh ri d

d
dqg d

x
duh wkh vdph/ vr wkdw vr wkdw d

d
+O, @ @ +4 , d

x
+O, = Rqh
sdudphwhu fkrlfh lghqwlhv wkh wzr sro|qrpldov1
Dowhuqdwlyho|/ prwlydwhg e| lqirupdwlrq odjv/ zh pljkw mrlq dqwlflsdwhg dqg xqdqwlflsdwhg prghov e|
doorzlqj rqo| n shulrg h{shfwdwlrqv wr dhfw rxwsxw/
|
w
@ d

+O, ^p
w
H
wn
p
w
` .e

+O,
w
=
Diwhu soxjjlqj lq wkh prylqj dyhudjh uhsuhvhqwdwlrq iru prqh|/ zh rewdlq
d

+O, @

4 .f
pp>4
O .=== .f
pp>n4
O
n4

4
f
|p
+O, =
Dv n $4> zh uhfryhu wkh dqwlflsdwhg prqh| fdvh/ dv n @ 4> zh uhfryhu wkh xqdqwlflsdwhg prqh| fdvh1
Wklv prgho ohg wr n shulrg rvfloodwlrqv lq d

+O,/ vr L gr qrw suhvhqw wkh uhvxowv1 Prghov dorqj wklv olqh

pxvw doorz glhuhqw djhqwv wr kdyh glhuhqw lqirupdwlrq odjv/ lq rughu wr dyrlg n0shulrg g|qdplfv1
9
I assnmc valncs lor b in
+
|
= @
W
(u) [b6
|
( b) (6
|
.
|3
6
|
)[ K
W
(u) B
|
(3)
W_i?|U@|L?
Dcnoic ilc joini moving avcragc rcprcscniaiion ol onipni ano moncy (or lcocral lnnos
raic), as onc migli rccovcr lrom a VAI @u|ih all ilc orilogonalizaiion assnmpiions lavc
ccn imposco, as lollows.
%
6
|
+
|
&
=
%
S
66
(u) S
6+
(u)
S
+6
(u) S
++
(u)
& %
"
6|
"
+|
&
: .
#%
"
6|
"
+|
&
k
"
6|
"
+|
l
$
= U (4)
Lvcry iocniicaiion lormnla clow gocs ilrongl nnclangco in largcr VAIs. I orop con-
sianis ano possilc iimc ircnos, so ilai + ano 6 iypically rcprcscni ilc ocircnoco log ol
onipni ano a monciary aggrcgaic. I locns on ilc onipni rcsponsc io monciary policy, so I
oo noi qncsiion varialc sclcciion, spccicaiion, slock varialc cloicc, orilogonalizaiion,
ano sampling crror qncsiions ilai (riglily) pcrvaoc ilc VAI liicrainrc.
In orocr io iocniily @
W
(u) c snsiiinic ilc moving avcragc rcprcscniaiions lor +
|
ano
6
|
lrom cqnaiion (4) inio cqnaiion (3). Lqnaiing cocmcicnis on 0
6|
c wc oiain
S
+6
(u) = @
W
(u) [bS
66
(u) ( b) S
66
(0)[ ()
Jlc K
W
(u) arc irrclcvani: @
W
(u) is iocniico lrom ilc onipni ano moncy rcsponscs S
+6
(u)c
S
66
(u) alonc. I maicl powcrs ol u in cqnaiion () io no ilc i@
W

j lrom iS
+6c
j ano
iS
66c
j Lxpanoing ano maicling powcrs ol u, wc oiain
@
W
f
=
S
+6cf
S
66cf
: @
W

=
S
+6cc
b
S
3
&'f
@
W
&
S
66cc3&
S
66cf
: 0
In ilc spccial casc ilai only nnaniicipaico moncy maiicrs, b = 0c wc oo in laci rccovcr
ilc sirncinral cocmcicnis @
W
(u) lrom ilc impnlsc-rcsponsc lnnciion. (Onc can also scc
0
ilis laci lrom cqnaiion 2 oirccily.) Lqnaiion () simplics io
@
W
(u) = S
+6
(u) *S
66
(0) (0)
Il ilcrc is no oisiinciion ciwccn aniicipaico ano nnaniicipaico moncy, b = c wc nsc
ilc oynamic rcsponsc ol onipni io a nnii impnlsc io 4L?i), 6
|
railcr ilan io ilc moncy
??L@|L?, "
6|
Lqnaiion () simplics io
@
W
(u) = S
+6
(u) *S
66
(u) (7)
In ilis casc, ilc rcgrcssion cocmcicnis ol + on 6 arc invariani io policy, noi ilc impnlsc-
rcsponsc lnnciion. For cxamplc, Iomcr ano Iomcr (994) analyzc sysicmaiic policy wiil
a vicw ilai ilcrc is no cxpccico-nncxpccico oisiinciion. Corrccily, givcn ilis vicw, ilcy
prcscni a oynamic simnlaiion ol ilc rcgrcssion ol + on laggco + ano laggco 6 io mcasnrc
ilc cnccis ol monciary policy railcr ilan an impnlsc-rcsponsc lnnciion.
Jlc Lncas moocl also makcs prcoiciions aoni priccs. In iis icxiook lorm, ii is
ocrivco lrom a rclaiion ciwccn onipni ano pricc snrpriscs
+
|
=
w
w
[R
|
.
|3
R
|
[
iogcilcr wiil
6
|
= +
|
R
|

I oo noi nsc mcasnrco pricc rcsponscs in ilc calcnlaiions ilai lollow. y locns is on ilc
cncci ol ilc cxpccico-nncxpccico iocniilying assnmpiion on ilc moncy io onipni rclaiion.
For ilis locns, I oon`i wani io imposc moocl pricc rcsiriciions on ilc VAIs, or lnrilcr
gcncralizc ilc moocls so ilcrc arcn`i any pricc rcsiriciions. Also, rcsnlis ilai inclnoc
priccs arc scnsiiivc io ilc cloicc ol inocx. (For cxamplc, scc ilc oincrcncc ciwccn ilc
commooiiy pricc ano GDI ocnaior rcsponscs in Fignrc .) I oon`i wani pricc mcasnrcmcni

issncs io inicrlcrc wiil ilc inicrprciaiion ol ilc moncy-onipni rclaiion. Finally, ilcrc arc
oincrcni moocls ilai givc ilc samc qnaniiiy prcoiciions ni oincr on pricc prcoiciions.
(For cxamplc, ilc Lncas ano Woooloro 994 moocl in wlicl rms sci ilcir snpply cnrvc
in aovancc also gcncraics onipni cnccis asco only on nnaniicipaico moncy slocks, ni
wiil oincrcni pricc prcoiciions ilan ilc Lncas 972 moocl.) Howcvcr, lor ilc pnrposc ol
cvalnaiing a }i? moocl ano iis ocscripiions ol alicrnaiivc policics, onc wonlo wani io
look ai all imporiani varialcs inclnoing priccs, ano imposc ano icsi any rcsiriciions.
2 5|U!) ThUi 4L_i*
L_i*
A mcclanisiic rclaiion ciwccn moncy ano onipni, +
|
= @ (u) 6
|
is noi consiocrco
a scrions aniicipaico moncy moocl y ilcorisis, ocspiic iis coniinnco popnlariiy in pol-
icy oiscnssions (ilc ascncc ol any oisiinciion ciwccn cxpccico ano nncxpccico policy
aciions) ano cmpirical work. Insicao, moocls in wlicl priccs arc xco in aovancc y nom-
inal coniracis or oilcr lriciions arc a common ano iracialc lramcwork ilai can gcncraic
aniicipaico moncy cnccis.
Onc mnsi ol conrsc spccily wlai priccs arc sci |L in aovancc. I nsc a sligli mooica-
iion ol an cxplicii siicky pricc moocl onc io Ioicmcrg (982, 994). Iis spccicaiion ano
ccniral prcoiciions arc iypical ol many siicky pricc ano nominal coniraci moocls. Ioicm-
crg posiis a ociailco ano rigorons microcconomic sirncinrc. Howcvcr, lis loglincarizco
rsi orocr conoiiions arc ilc samc as ilosc ol a rcprcscniaiivc pricc-sciicr wlo maximizcs
an ojcciivc lnnciion wiil a pricc aojnsimcni cosi icrm,
max
tR
|

2
.
[
|
q
|
k
( k) ( kq) (R
|
6
|
)
2
k(R
|
R
|3
)
2
l
(8)
k is a paramcicr ciwccn 0 ano ilai mcasnrcs ilc cosis ol pricc aojnsimcni. Scaling
2
ilc rsi icrm y kq las no cncci on ilc prolcm, ni simplics ilc lollowing cx-
prcssions. Jlc raiio ol lcvcl cosis io pricc clangc cosis is all ilai maiicrs. Jlai cosi
raiio, k* [( k)( kq)[ c gocs monoionically lrom 0 io 4 as k gocs lrom 0 io I
mooily Ioicmcrg`s moocl sliglily y rcqniring R
|
io c sci as a lnnciion ol iimc |
inlormaiion. In ilis way, ilc limii k $ 0 lcaos io ilc nncxpccico moncy moocl railcr
ilan jnsi R
|
= 6
|
ano +
|
= consiani.
Jlc rsi orocr conoiiion is

k
2
q

R
|
kR
|3
kq.
|3
R
|n
= ( k) ( kq) .
|3
6
|
Facioring ilc lag polynomial ano solving lor priccs, wc oiain
R
|
= kR
|3
( k) ( kq) .
|3
"
[
'f
(kq)

6
|n
(9)
Jo moocl ilc rclaiion ciwccn onipni ano moncy, I aoo moncy ocmano 6
|
= R
|
+
|
,
lcaoing io
+
|
= 6
|
R
|
=
%
6
|

k
ku
.
|3
kq
kqu
3
6
|
&

Jlis simplc sirncinrc capinrcs cnccis common io mosi siicky pricc ano ovcrlapping
coniraci moocls. Iriccs can risc ano lcncc onipni can occlinc in rcsponsc io iTiU|i_
u|hi monciary incrcascs. Iriccs aoapi slowly io monciary slocks. Jlc moocl imposcs
long-rnn ncniraliiy: + = 0 lor any consiani lcvcl ol 6
Aovc, wc aooco ao-loc oynamics ano rcal slocks io ilc Lncas moocl so ilai ii conlo
c nsco io inicrprci ilc impnlsc-rcsponsc lnnciion lrom a VAI. Jlc nainral analogy is
3
io aoo ao-loc oynamics io ilc siicky pricc moocl, giving

+
|
= @
W
(u)
%
6
|

k
ku
.
|3
#
kq
kqu
3
6
|
$&
K
W
(u) B
|
(0)
Wc can ilink ol ilis moocl as allowing vclociiy io rcspono io monciary slocks, i.c.
+
|
= @
W
(u) (6
|
R
|
)
W_i?|U@|L?
I prcspccily k ano q. q is a oisconni lacior, wlicl I spccily as q = 098. Jlc rcsnlis
arc inscnsiiivc io q so long as ii is ncarcr io ilan io 0. I vary ilc paramcicr k lrom 0 io
ano irack ilc rcsnlis, as wc cxaminco ilc scnsiiiviiy io ilc paramcicr b in ilc aniicipaico-
nnaniicipaico moocl (3). Wc can ilcn iocniily @
W
(u) lrom ilc impnlsc-rcsponsc lnnciion.
Ilngging ilc VAI rcsponscs S
66
(u)c S
+6
(u) io moncy slocks inio (0), wc oiain
e
( ku)( kqu
3
)S
+6
(u) =
6
L lqyhvwljdwhg dq dowhuqdwlyh zd| wr hqulfk wkh g|qdplfv/ e| dgglqj kljkhu ghulydwlyhv wr wkh remhfwlyh
ixqfwlrq/

4
5
H
[
w

w
%
+s
w
p
w
,
5
.
4
[
n@4

n
+s
w
s
wn
,
5
&
Wkh h{lelolw| lq +O, doorzv wkh prgho wr surgxfh pruh frpsoh{ prqh| dqg rxwsxw lpsxovh0uhvsrqvh
ixqfwlrqv1 Krzhyhu/ doo lpsxovh0uhvsrqvh ixqfwlrqv duh qrw srvvleoh/ vr wklv prgho vwloo lpsrvhv uhvwulfwlrqv
rq f
|p
+O, dqg f
pp
+O, wkdw duh qrw vdwlvhg e| wkh srlqw hvwlpdwhv ri wkh YDUv lqyhvwljdwhg ehorz1 Rqh
frxog hvwlpdwh wklv prgho e| pd{lpxp olnholkrrg/ lpsrvlqj lwv uhvwulfwlrqv rq wkh gdwd1 Krzhyhu/ wkh
frvwv ri kljkhu ghulydwlyhv ri sulfh fkdqjh gr qrw vhhp pxfk pruh frpshoolqj wkdq wkh d

+O, sro|qrpldo
dv d srolf|0lqyduldqw ghvfulswlrq ri whfkqrorj|1
Lw lv whpswlqj wr jhqhudol}h wkh prgho +43, e| vlpso| doorzlqj jhqhudo odjjhg hhfwv ri d glvwulexwhg
ohdg ri ixwxuh prqh|/
d

+O, s
w
@ H
w
g

O
4

p
w
=
Wklv irup fdswxuhv wkh pdmrulw| ri vwlfn| sulfh ru qrplqdo frqwudfw prghov1 Krzhyhu/ rqh fdqqrw vhs0
dudwho| lghqwli| d

dqg e

1 Ixuwkhupruh/ wkh srlqw ri wkh vwlfn| sulfh prgho lv wkdw wkh iruzdug dqg
edfnzdug odj sro|qrpldov duh olqnhg e| frpprq _whfkqrorjlfdo% sdudphwhuv1
7
Zh rewdlq gluhfwo|
f
|p
+O,
pw
@ d

+O,

4
4
4 O
H
w4
4
4 O
4

f
pp
+O,
pw
=
Qrz/
H
w4
4
4 O
4
f
pp
+O,
pw
@
f
pp
+O, f
pp
+,
4 O
4

pw
=
+\rx fdq fkhfn gluhfwo| wkdw wkh f
pp
+, whupv uhpryhv wkh fxuuhqw dqg ixwxuh
pw
1 Vhh Vdujhqw 4<;:
4
@
W
(u)
k
k( u)( qu
3
)S
66
(u) ( k)( kq)S
66
(kq)
l
()
As k $ 0, cqnaiion () rccovcrs ilc impnlsc-rcsponsc lnnciion as in ilc b = 0 casc,
cqnaiion (0). As k $ , wc rccovcr ilc samc oynamic mnliiplicr ol ilc b = casc,
cqnaiion (7). In ilc laiicr casc, ilc rm scis pricc R io a consiani. For k 5 (0c ), I
solvc cqnaiion () rccnrsivcly lor ilc
q
@
W

r
lrom valncs lor iS
66c
c S
+6c
j y maicling ilc
cocmcicnis on cacl powcr ol u. Jo calcnlaic ilc onipni rcsponsc io monciary cxpcrimcnis,
I rsi no ilc pricc pail. I solvc cqnaiion (9) lor priccs givcn a pail ol moncy
D
ano I
ilcn no onipni lrom
+
|
= @
W
(u) (6
|
R
|
)
Jlis moocl also makcs prcoiciions lor priccs. As aovc, I locns on ilc rclaiionslip
ciwccn moncy ano onipni, ignoring cxira rcsiriciions ilai comc lrom pricc oaia.
V+ hit*|t
2 V+c @?|UT@|i_?@?|UT@|i_ 4L_i*
Fignrc plois ilc rcsponscs io ilc moncy slock lor ilc 2 VAI, gnrc 2 collccis ilc
moncy ano onipni rcsponscs io a moncy slock. Jlc appcnoix ocscrics ilc 2 VAI in
ociail.
s1 6371 , Khqfh/
f
|p
+O, @ d

+O,

f
pp
+O,

4
4 O

4
4 O
4

^f
pp
+O, f
pp
+,`

Htxdwlrq +44, iroorzv e| pxowlso|lqj erwk vlghv e| +4 O,

4 O
4

dqg vlpsoli|lqj wkh frhflhqw

rq f
pp
+O,1
8
L qg s
4
iurp wkh uhtxluhphqw wkdw sulfhv qrw h{sorgh dv w $ 4/ dqg wkhq qg rwkhu sulfhv
uhfxuvlyho|1 Wkh vroxwlrqv duh
4, Dqwlflsdwhg vwhs= w 4 = s
w
@
4
4
5

+,
4w
> w 4 = s
w
@ 4

4
4
5

w
=
5, Xqdqwlflsdwhg vwhs= w 3 = s
w
@ 3> w 4 = s
w
@ 4
w4
=
6, Xqdqwlflsdwhg eols= s
w
@ 3=
7, Dqwlflsdwhg eols= w 4 = s
w
@
+4,+4,
4
5

+,
4w
> w A 4 = s
w
@
+4,+4,
4
5

[Inscri gnrc 3 lcrc[

Jlc lcli lano pancl ol Fignrc 3 prcscnis ilc lag polynomials @
W
(u) ilai wc csiimaic
assnming ilai varions lraciions ol aniicipaico ano nnaniicipaico moncy ancci onipni.
Jlis is also ilc cncci on onipni ol a pariicnlar monciary inicrvcniion, a nnii innovaiion
in moncy ilai lasis onc pcrioo, or an nnaniicipaico lip.
Jlc cnccis ol ilis cxpcrimcni arc ilc samc across iocniilying assnmpiions lor ilc rsi
qnaricr. Lni ilcn ilc onipni cncci calcnlaico wiil ilc nnaniicipaico-moncy assnmpiion
incrcascs oramaiically, ano occays ack io zcro vcry slowly. Jlis cncci is, ol conrsc,
cxacily ilc moncy io onipni impnlsc-rcsponsc lnnciion ploiico in Fignrc ano Fignrc 2.
Jlc onipni cncci calcnlaico wiil no aniicipaico,nnaniicipaico oisiinciion is vcry
small, ano rcvcris io zcro alicr ilrcc qnaricrs. Il ilis wcrc ilc irnc moocl, ilc impnlsc-
rcsponsc lnnciion wonlo givc a ih) mislcaoing gnioc io ilc cnccis ol ilis monciary
inicrvcniion! Fnrilcrmorc, onc only nccos io assnmc ilai aniicipaico moncy maiicrs
sliglily in orocr io iocniily slori-livco cnccis ol ilis monciary inicrvcniion. Jlc b = 02
assnmpiion proonccs a rcsponsc paiicrn mncl closcr io ilc complcicly aniicipaico (b = )
assnmpiion ilan io ilc complcicly nnaniicipaico (b = 0) assnmpiion.
Ol conrsc, all ilc moocls (valncs ol b) givc iocniical onipni rcsponscs io a moncy
innovaiion ilai is lollowco y lnrilcr incrcascs in moncy prcscrico y ilc moncy $
moncy rcsponsc lnnciion. Jlcy oincr on ilc qncsiion, Wlai il ilc Fco slocks moncy,
ano ilcn lollows a pail ol lninrc moncy _gihi?| lrom ilc lisiorical paiicrn
An @??L?Ui_ lip in moncy is anoilcr inicrcsiing monciary cxpcrimcni, sincc any
policy can c occomposco inio a snm ol cxpccico ano nncxpccico lips. Jlc rigli lano
pancl ol Fignrc 3 prcscnis calcnlaiions ol ilc rcsponsc io an annonncco lip. Now, ilc
aniicipaico moncy moocl rcsponsc is ilc largcsi (lcasi small), ano ilc samc as in ilc lcli
0
lano pancl. As nnaniicipaico moncy maiicrs morc, ilc rcsponsc gcis smallcr. Il only
nnaniicipaico moncy maiicrs, ilcrc is ol conrsc no rcsponsc io ilis aniicipaico lip.
In cvcry casc, ilc onipni rcsponscs onc sccs arc mncl tLh|ih ano t4@**ih ilan ilc
impnlsc-rcsponsc lnnciion il onc allows aniicipaico moncy io cvcn lavc somc ancci onipni.
Jlc ilcorciical iocniicaiion is qnaniiiaiivcly ano cconomically imporiani: ilis is noi a
minor issnc ol lorgoiicn 970`s mcilooological ocaics.
2 2 V+c t|U!) ThUi 4L_i*
Fignrc 4 prcscnis ilc lag polynomial @
W
(u) inlcrrco lrom ilc impnlsc rcsponsc lnnciion
wiil ilc siicky pricc moocl, via cqnaiion (), lor scvcral valncs ol ilc pricc siickincss
paramcicr, k. Again, k = 0 rccovcrs ilc impnlsc-rcsponsc lnnciion, ano k = rccovcrs
ilc samc rcsponsc as ilc mcclanisiic moocl wiil b = . Inicrmcoiaic valncs ol k givc
inicrmcoiaic rcsnlis.
For a low valnc ol pricc siickincss kc wc ncco a orawn-oni lag polynomial @
W
(u) in orocr
io maicl ilc VAI impnlsc-rcsponsc lnnciion. For liglcr valncs ol k ilc lag polynomial
@
W
(u) ccomcs mncl smallcr ano sloricr. orc ol ilc oynamic rclaiion ciwccn moncy
ano onipni can c acconnico lor y ilc siickincss in ilc moocl, rcqniring lcss work lrom
ilc ao-loc lags @
W
(u) As Ioicmcrg (994) argncs, ilis moocl proviocs a rcasonalc
acconni ol ilc oaia cvcn wiil no ao-loc lags, @
W
(u) = , so long as onc imposcs a ligl
valnc ol pricc siickincss, aovc 08 or 09
[Inscri Fignrc 4 lcrc[
Onc mnsi qncsiion wlcilcr sncl a ligl valnc ol ilc pricc siickincss paramcicr is
rcasonalc. k = 08 implics ilai ilc rclaiivc cosis ol pricc clangc ano pricc lcvcl ocvia-
iions is k* [( k) ( kq)[ = 7 (scc ilc rm`s prolcm, cqnaiion 8). A / qnaricrly
7
pricc incrcasc las ilc samc cosis as priccs 7/ away lrom ilcir propcr lcvcl. Ioicmcrg
(982, 994) argncs ilai ilcsc rclaiivc cosis arc noi so nnrcasonalc, in ilai ilc cosis ol
pricc-lcvcl ocviaiions may c low. Hc posiis a moocl ol oisaggrcgaico monopolisiically
compciiiivc rms, in wlicl ilc cosis ol laving a pricc lcvcl oincrcni lrom ilc inonsiry
avcragc arc ligl, ni ilc inonsiry avcragc can ocviaic lrom 6
|
y a grcai ocal wiil liiilc
cosi.
Fignrc prcscnis ilc calcnlaico rcsponscs io aniicipaico ano nnaniicipaico sicps ano
lips in moncy lor pricc siickincss k = 08. Jlc k = 0 ano k = limiis arc ilc samc as
ilc aniicipaico b = 0 ano nnaniicipaico b = moocls invcsiigaico aovc. k = 08 makcs
an inicrcsiing inicrmcoiaic casc. I inclnoc ilc pricc pails, sincc ilcy makc clcar low ilc
onipni rcsponscs arc gcncraico.
[Inscri gnrc lcrc[
Siari wiil ilc iop lcli corncr, an nnaniicipaico lip in moncy. Iriccs oo noi movc
ai all in ilis casc. Jlcy cannoi movc nniil onc pcrioo alicr ilc lip is known io lavc
lappcnco. Lni y ilis iimc, moncy las rcinrnco io iis original lcvcl ano is cxpccico io
rcmain ilcrc. Sincc +
|
= @
W
(u) (6
|
R
|
) c onipni lollows ilis onc-pcrioo impnlsc 6
|
R
|
wiil ilc lag paiicrn @
W
(u). Sincc ilc lags @
W
(u) arc small ano slori, ilc moocl prcoicis
a small ano slori onipni rcsponsc.
Noiicc ilc connicrininiiivc rcsnli: Assnming t|U!ih priccs implics tLh|ih @?_ t4@**ih
cnccis ol ilcsc monciary inicrvcniions ilan is givcn y ilc impnlsc-rcsponsc lnnciions.
Jlc assnmpiion ol siickicr priccs lorccs ns io csiimaic a mncl smallcr ano sloricr oynamic
rclaiion @
W
(u) io rcmain consisicni io ilc VAI rcprcscniaiion ol ilc oaia.
Ncxi look ai ilc cnccis ol an @?iicipaico moncy lip in ilc iop rigli corncr. Now
priccs risc somcwlai in aovancc ol ilc lip, ni noi mncl sincc ilc lip is cxpccico io
8
lasi only onc pcrioo ano ii is cosily io raisc priccs. Jlcrclorc, ilc onipni rcsponsc is
similar io, ni sliglily smallcr ilan ilc paiicrn lonno lor ilc nnaniicipaico lip.
Jlc oiiom row, lcli, prcscnis an nnaniicipaico sicp in moncy. Alicr ilc moncy
innovaiion, priccs slowly incrcasc. Jlc onipni rcsponsc looks almosi likc ilc impnlsc-
rcsponsc lnnciion. Ii slonlo, sincc ilc nnaniicipaico sicp is similar io ilc acinal policy
rcgimc. Jlc mcclanism y wlicl ilis moocl rcproonccs a orawn-oni rcsponsc is qniic
oincrcni lrom ilc nnaniicipaico moncy moocl lowcvcr. Jlc oincrcncc ciwccn 6 ano R
is now sirnng oni ovcr many qnaricrs. +
|
= @
W
(u) (6
|
R
|
) ilns givcs a orawn oni cncci
ol ilis many-pcrioo impnlsc ilrongl ilc rclaiivcly slori sirncinral lag @
W
(u).
Wlcn ilc moncy sicp is aniicipaico (oiiom row, rigli), priccs risc in aniicipaiion
ol ilc monciary cxpansion. Jlc pricc risc is slow ano smooil, sincc ilc pricc siickincss
paramcicr is largc. Jlc laci ilai q is ncar onc makcs ilc pricc pail ncarly symmcirical.
Onipni _iU*?it in aovancc ol ilc moncy sicp, ano rccovcrs wlcn ilc incrcasc in moncy
acinally occnrs. Jlc major cncci ol an aniicipaico sicp in moncy is a _iThitt?} cncci
on onipni!
Comparing across colnmns, ii is clcar ilai moocls wiil pricc siickincss cannoi c
nsco io jnsiily mcclanical rclaiions ciwccn onipni ano moncy ilai oo noi oisiingnisl
aniicipaico ano nnaniicipaico cnccis. Wlilc a mcclanical rclaiion is irnc lor ??|i
siickincss (k = ano consiani priccs) cvcn wiil siickincss k = 08 or pricc clangc
cosis 7 iimcs ilc cosi ol pricc lcvcl crrors, onc oiains oramaiically oincrcni prcoiciions
lor an aniicipaico vs. nnaniicipaico moncy sicp. Jlc rcason is simplc ano gcncral:
inicricmporally opiimizing agcnis lacco wiil somc lriciion will aiicmpi io aojnsi MiuLhi
an cxpccico clangc in policy. In laci, ilc largcr ilc lriciions onc prcscnis io cconomic
agcnis, ilc larilcr alcao ilcy will siari io aojnsi io ilc cxpccico clangc in policy.
9
6i_ih@* 6?_t V+
Jlc monciary VAI liicrainrc las rcccnily irico on varialcs oilcr ilan monciary aggrc-
gaics as inoicaiors ol a clangc in monciary policy. Lcrnankc ano Llinocr (988) rsi nsco
ilc lcocral lnnos raic. Jlcir ioca is ilai ilc Fco conirols ilc lnnos raic on a oay-io-oay
asis, accommooaiing slilis in moncy ocmano. A slili in moncy snpply is sccn wlcn ilc
Fco clangcs ilc lcocral lnnos raic.
Jlc oiiom row ol Fignrc plois rcsponscs io lcocral lnnos slocks. Following Clris-
iiano Liclcnanm ano Lvans (997) I orilogonalizc lcocral lnnos lasi ano inclnoc a
commooiiy pricc inocx in ilc VAI. Fcocral lnnos VAIs wiiloni ilis lcainrc prooncc a
pricc pnzzlcincrcascs in ilc lcocral lnnos raic prooncc ?Uhi@tit in priccs. Clrisiiano
Liclcnanm ano Lvans cxplain ilai ilc Fco coniracis on ncws ol lninrc innaiion, inonc-
ing a spnrions corrclaiion ciwccn coniraciionary slocks ano snscqncni pricc riscs. Ly
inclnoing a commooiiy pricc inocx ano orilogonalizing lcocral lnnos lasi, ilcy conirol lor
ilc Fco`s inlormaiion. orc pragmaiically, ilcsc cloiccs prooncc ciicr-looking picinrcs.
Jlc appcnoix ociails ilc spccicaiion ano csiimaiion ol ilc VAI.
Fignrc 0 prcscnis onipni rcsponscs io lcocral lnnos slocks, again imposing ilai varions
lraciions ol aniicipaico ano nnaniicipaico slocks can ancci onipni. Wc scc ilc nsnal
paiicrn ilai rcsponscs calcnlaico assnming ilai aniicipaico moncy maiicrs or ilai ilc
slock is aniicipaico arc mncl smallcr ano sloricr ilan ilc impnlsc-rcsponsc lnnciion
snggcsis. Jlc aniicipaico-moncy cnccis ol ilc slock pcak in ilrcc qnaricrs, wlilc ilc
nnaniicipaico-moncy cnccis pcak in 7 qnaricrs ano ilcn oic on slowly.
[Inscri gnrc 0 lcrc[
I oo noi prcscni calcnlaiions lor ilc siicky pricc moocl ccansc ii is nnclcar low
20
io apply ilai moocl io somciling oilcr ilan an acinal moncy aggrcgaic. (Lvcn in ilc
nnaniicipaico moocl, ii is nnclcar wlai a lcocral lnnos slock mcans. Il only nnaniicipaico
monciary policy las non-ncniral cnccis ilc iocniilying assnmpiion clino impnlsc-
rcsponsc lnnciions wlai oocs ilc Fco rcaciion lnnciion cqnaiion ol ilc VAI mcan)
e W?|ihThi|@|L?
`U i t h}|q
As wc lavc sccn, ilc aniicipaico,nnaniicipaico iocniilying assnmpiion makcs a largc
oincrcncc io ilc rcsnlis. Wlicl iocniilying assnmpiion is corrcci Again, ilc oaia (lrom
onc rcgimc) cannoi icll ns. Howcvcr, wc can cvalnaic ilc plansiiliiy ol ilc rcsnlis.
Firsi, in ilc nnaniicipaico moncy vicw, ilc siriking similariiy ol ilc onipni ano moncy
rcsponscs is a pnrc ano nnlikcly coinciocncc, sincc ilc onipni rcsponsc wonlo c ilc samc
lor any moncy rcsponsc. In ilc aniicipaico moncy vicw, ilc onipni rcsponsc las iis largc,
proiracico ano lnmp slapc prcciscly MiU@ti ilc moncy rcsponsc las ilc samc slapc. Lcss
pcrsisicni monciary policics wonlo givc risc io lcss pcrsisicni onipni rcsponscs. Onc may
oislikc ilcorics ilai rcqnirc sncl coinciocnccs in ilc oaia. Sccono, ilc nnaniicipaico
moncy vicw rcqnircs ilai onc consirnci a ilcory ol ilc long oclayco ano lnmp-slapco
rcsponsc, or swallow ilcsc oynamics as an ao-loc paicl. Jlc aniicipaico moncy vicws
rcsnli in csiimaics ol a slori, almosi conicmporancons cncci, ol ilc sori gcncraico y
mosi cnrrcni monciary ilcorics. Loil ol ilcsc consiocraiions snggcsi (ni ol conrsc
cannoi provc) ilai ilcrc is ai lcasi somc rolc lor aniicipaico, sysicmaiic monciary policy.
W4T*U@|L?t uLh 4L?i|@h) |iLh)
Lvcninally, wc wani lormal ilcorciical moocls, spccico ai ilc lcvcl ol policy-invariani
iasics, icclnology, monciary ano rcal lriciions, railcr ilan aniicipaico,nnaniicipaico
2
oisiinciions. Jlc moocls slonlo cxplain ilc VAI cviocncc, ano ilcy slonlo c consisicni
wiil ai lcasi ilc roao rnsl ol cxpcricnccs wiil oincrcni rcgimcs.
Jlc ilcorics I imposco on ilc oaia arc a long way lrom ilis iocal. Jlc asic
nnaniicipaico moncy moocl +
|
= @
W
(u) (6
|
.
|3
6
|
) oocs csi on consisicncy across
rcgimcs. Lni ilc lcari ol ilc moocl lor cxplaining posiwar US iimc scrics is ilc long,
largc, ano lnmp-slapco oisirinico lag @
W
(u) Jlai lag is qncsiionaly policy-invariani:
oisirnsi ol ilis lag polynomial is cxacily my moiivaiion lor looking ai aniicipaico moncy
moocls. Jlc mcclanisiic moocl +
|
= @
W
(u) 6
|
las ol conrsc ccn snjcci io a gcncraiion
ol ocrision. Jlc siicky pricc moocl I cxaminc, likc mosi aniicipaico-moncy moocls, is
also qncsiionaly policy-invariani. Imaginc nsing ilc Ioicmcrg (982, 994) siicky
pricc moocl, Jaylor`s (979) ovcrlapping coniraci moocl or a casl in aovancc moocl
wiil lriciions sncl as Clrisiiano ano Liclcnanm (992) io nnocrsiano a lypcrinnaiion.
In ilai rcgimc, coniraci lcngils arc opiimally closcn io c mncl sloricr, onc wonlo
oonilcss no almosi no pricc siickincss, ano ilc iiming convcniions ano porilolio lriciions
ol a CIA moocl wonlo snrcly oisappcar. Ovionsly, ilc coniraci lcngil, pricc siickincss,
iiming convcniions ano porilolio lriciions arc noi rcally xco, policy invariani lcainrcs ol
icclnology: onc migli also cxpcci ilcm io clangc in rcsponsc io lcss orasiic clangcs in
rcgimc. Hcncc ilc occp paramcicrs ilc moocl nccos io spccily, ano ilc poor cmpiricisi
las io iry io csiimaic, rclaic io ilc icclnology ol coniraciing, or ilc cosis ol aoopiing
oincrcni iiming convcniions or porilolio laiis. Sncl moocls arc noi yci wriiicn, lci alonc
rcaoy io csiimaic.
Jlns, cxisiing cxplicii monciary ilcorics, spccico ai ilc lcvcl ol iasics, icclnology
ano lriciions, arc also a long way lrom ilc iocal as wcll. Jlc rcsnlis ol ilis papcr arc, I
lopc, a nsclnl oaia snmmary lor ilc consirnciion ol ciicr cxplicii moocls. Jlc impnlsc
rcsponscs nainrally snggcsi ilai onc aoo amplicaiion ano pcrsisicncc mcclanisms io
22
an nnaniicipaico moncy moocl. For cxamplc, Clrisiiano ano Liclcnanm (992) aoo
porilolio aojnsimcni cosis io a liqnioiiy cncci casl in aovancc moocl, in orocr io prooncc
an cxicnoco rcsponsc lnnciion. Jlc rcsnlis snggcsi an alicrnaiivc pail: il onc consirncis
moocls wiil aniicipaico moncy cnccis, ilcy will noi rcqnirc sncl cxicnsivc amplicaiion
ano pcrsisicncc mcclanisms.
L*U) @_Ui
Lmpirical work is nsco lor policy aovicc as wcll as in gnioing ilc ilcorciical ocvcl-
opmcni ol monciary cconomics. Jlc Fco (ano iis criiics) asically wani io know lrom
acaocmics, wlai will lappcn il wc raisc ilc lnnos raic iooay Jlis is rcgaroco as an
csscniially cmpirical qncsiion, ano onc io wlicl cconomisis slonlo c alc io givc somc
answcr cyono waii nniil wc nisl consirnciing cxplicii oynamic gcncral cqnilirinm
monciary moocls wiil lriciions. Howcvcr, ilis is noi a pnrcly cmpirical qncsiion, ano
ilc ilcorciical iocniicaiion onc rings io ilc issnc, cvcn ai ilc simplisiic lcvcl ol oisiin-
gnisling aniicipaico lrom nnaniicipaico cnccis ilai I pnrsnc lcrc, las a largc impaci on
ilc answcr onc givcs.
Jlc nnaniicipaico moncy assnmpiion rcsnlis in onc sci ol answcrs: Il ilc lnnos raic
incrcasc is aniicipaico il ilis is ilc normal iimc or sci ol cvcnis lor a lnnos raic incrcasc
ilcrc will c no onipni cncci. Il ilc lnnos raic incrcasc is noi aniicipaico, ilcrc will
c a long, largc, ano lnmp-slapco cncci on onipni as givcn y ilc impnlsc rcsponsc
lnnciion. Wlai snscqncni aciions ilc Fco iakcs arc irrclcvani io ilc answcr.
Jlc aniicipaico moncy assnmpiion rcsnlis in qniic oincrcni answcrs: Iolicy aciions
no longcr only snrpriscs rcsnli in slori ano small onipni rcsponscs. A long-lasiing
ano largc onipni risc can only occnr il ilc Fco coniinncs cxpansionary policy aciions in
ilc lninrc, as ii iypically las in ilc pasi.
23
Jwo opinions rnn ilrongl mncl ocaic ovcr ilc Fco`s inicrcsi raic policy: ) A
lcocral lnnos raic risc now canscs onipni occlincs ilai pcak in onc ano a lall io iwo
ycars: 2) Ii oocsn`i maiicr ilai mosi lcocral lnnos raic clangcs arc pari ol a slow ano
prcoicialc iiglicning or looscning, i.c. lcocral lnnos raic clangcs arc largcly aniicipaico.
Ai a minimnm, ilc rcsnlis in Fignrc 0 slows ilai ilcsc iwo vicws arc inconsisicni, in
ilai opposiic ilcorciical assnmpiions mnsi c maoc lor ilc iwo conclnsions. Il ilc
aniicipaico graonal iiglicnings lavc @?) cncci, ilcy lavc ilc slori ano small cnccis
graplco lor b = Il onc clicvcs in a largc ano .-2 ycar oclayco cncci, ilcn only
snrprisc movcmcnis in lcocral lnnos will lavc any cncci ai all.
D 544@h) @?_ L?U*tL?
Jlis papcr claoraics iwo siorics lor ilc largc ano orawn oni onipni rcsponscs wc scc in
VAIs. Liilcr ) ilc largc ano orawn oni onipni rcsponscs rcally oo rcprcscni largc ano
orawn oni cnccis ol ilc iniiial slock, cnccis ilai wonlo c prcscni no maiicr wlai ilc
pail ol monciary policy alicr ilc slock,or 2) ilc largc ano orawn oni onipni rcsponscs
occnr MiU@ti monciary policy also las a largc ano orawn oni rcsponsc io ilc iniiial
slock. Il monciary policy wcrc lcss pcrsisicni, ilc onipni rcsponsc lnnciions wonlo c
lcss pcrsisicni as wcll. Howcvcr, ilis vicw rcqnircs ilai aniicipaico monciary policy can
ancci onipni.
Jlc scnsiiiviiy ol ilc onipni cncci calcnlaiions io ilc aniicipaico,nnaniicipaico iocn-
iilying assnmpiion is a sirong, qnaniiiaiivc rcminocr ol ilc mcilooological warning Sar-
gcni (970) gavc almosi 20 ycars ago. Lsiimaics ol ilc cnccis ol monciary policy, ano
calcnlaiions sncl as low wonlo onipni lavc clavco il ilc Fco lollowco a oincrcni rnlc
sncl as nominal GNI iargciing, arc almosi cniircly orivcn y ilc |iLhi|U@* assnmpiions
onc makcs. Jlc oaia alonc oo noi answcr ilcsc qncsiions.
24
Jlc rcsnlis onc oiains y imposing oincrcni vicws on ilc cnccis ol aniicipaico moncy
arc snilc. Siicky pricc moocls oo noi jnsiily a vicw ilai onc can ignorc ilc oisiinciion
ciwccn aniicipaico ano nnaniicipaico componcnis ol monciary policy. Fnrilcrmorc, ilc
csiimaico sizc ano pcrsisicncc ol onipni rcsponscs may c smallcr wlcn onc assnmcs
siickicr priccs, ccansc onc nccos io assnmc a sloricr oynamic rclaiion wlcn aniicipaico
moncy cnccis arc allowco.
Finally, ilc onipni rcsponscs calcnlaico assnming ilai aniicipaico moncy can ancci
onipni arc mncl smallcr ano sloricr ilan ilosc rccovcrco lrom ilc impnlsc-rcsponsc
lnnciion. Il yonr priors arc in lavor ol small slori cnccis ol monciary policy, or moocls
wiil lcss rcliancc on ao-loc oynamics, ilis laci may snggcsi io yon ilai aniicipaico
moncy ano sysicmaiic monciary policy can in laci ancci onipni.
2
S +iuihi?Uit
Alvarcz, Fcrnanoo ano Anorcw Aikcson, 990, Liqnioiiy, Innaiion, Inicrcsi Iaics ano
Lxclangc Iaics, annscripi, Univcrsiiy ol Icnnsylvania.
Anocrson, L. C. ano J. L. Joroan, 908, onciary ano Fiscal Aciions: A Jcsi ol Jlcir
Iclaiivc Imporiancc in Lconomic Siailizaiion, 6i_ih@* @?! Lu 5| wLt +ii
0, -23
Lall, Lanrcncc ano Sicplcn G. Cccclciii, 988, Impcrlcci inlormaiion ano siaggcrco
pricc sciiing 4ihU@? ,UL?L4U +ii .Hc 999-08.
Lcrnankc, Lcn S. ano Alan S. Llinocr, 988, Jlc Fcocral Fnnos Iaic ano ilc Clanncls
ol onciary Jransmission 4ihU@? ,UL?L4U +ii 82, 90-92.
Llanclaro, Olivicr J., 990, Wly Docs oncy Ancci Onipni: A Snrvcy, In Lcnjamin
. Fricoman ano Frank H. Haln, cos., O@?_MLL! Lu L?i|@h) ,UL?L4Ut V. II,
Amsicroam, Ncw York: Noril-Hollano Llscvicr Scicncc Inlislcrs L.V. 779-83.
Clrisiiano, Lawrcncc J., ariin Liclcnanm, 992, Liqnioiiy Lnccis ano ilc onciary
Jransmission cclanism, 4ihU@? ,UL?L4U +ii 82, 340-3.
Clrisiiano, Lawrcncc J., ariin Liclcnanm, 99, Liqnioiiy Lnccis, onciary Iolicy
ano ilc Lnsincss Cyclc, aLh?@* Lu L?i)c hi_| @?_ @?!?} 27 (Novcmcr pari
I) 3-30.
Clrisiiano, Lawrcncc J., ariin Liclcnanm, ano Clarlcs Lvans 997 Jlc Lnccis ol
onciary Iolicy Slocks: Somc Lviocncc From ilc Flow ol Fnnos Forilcoming
+ii Lu ,UL?L4Ut @?_ 5|@|t|Ut
20
Coclranc, Joln H., 994a, Slocks, @h?i}i+LUit|ih L?uihi?Ui 5ihit L? M*U
L*U) 4, 29-304.
Coclranc, Joln H., 994, Commcni on Iomcr ano Iomcr in Sianlcy Fisclcr ano
Jnlio J. Ioicmcrg, Los., 994 ,+ @UhLiUL?L4Ut ??@*c Camriogc: IJ
Ircss, 8-74.
Liclcnanm, ariin, 992 Commcnis on Inicrprciing ilc macrocconomic iimc scrics
lacis: Jlc cnccis ol monciary policy` y Clrisioplcr Sims, ,hLTi@? ,UL?L4U
+ii 30, 00-0.
Fclosicin, ariin ano Jamcs H. Siock 994 Jlc Usc ol a onciary Aggrcgaic io Jargci
Nominal GDI, in N. Grcgory ankiw, Lo., L?i|@h) L*U) Clicago: Univcrsiiy
ol Clicago Ircss.
Fricoman, ilion ano Anna J. Sclwariz, 903, L?i|@h) Ot|Lh) Lu |i N?|i_ 5|@|it
HS.bSf, Irinccion: Irinccion Univcrsiiy Ircss.
Fricoman, ilion, 908, Jlc Iolc ol onciary Iolicy, 4ihU@? ,UL?L4U +ii
8, -7.
Fncrsi, Jimoily 992, Liqnioiiy, Loanalc Fnnos ano Ical Aciiviiy, aLh?@* Lu L?
i|@h) ,UL?L4Ut 29, 3-24.
Goroon, Davio L. ano Lric . Lccpcr, 993, Jlc Dynamic Impacis ol onciary Iolicy:
An Lxcrcisc in Jcniaiivc Iocniicaiion aLh?@* Lu L*|U@* ,UL?L4) 02, 228-
247.
Grossman, Sanloro ano Lanrcncc Wciss, 983, A Jransaciions-Lasco oocl ol ilc
onciary Jransmission cclanism, 4ihU@? ,UL?L4U +ii 73, 87-27.
27
Hall, Iocri L. ano N. Grcgory ankiw, 994, Nominal Incomc Jargciing, in N.
Grcgory ankiw, Lo., L?i|@h) L*U)c Clicago: Univcrsiiy ol Clicago Ircss.
Lncas, Iocri L. Jr., 972, Lxpcciaiions ano ilc Ncniraliiy ol oncy, aLh?@* Lu
,UL?L4U AiLh) 4, 03-24.
Lncas, Iocri L. Jr., 973, Somc Inicrnaiional Lviocncc on Onipni-Innaiion Jraoc-
Ons, 4ihU@? ,UL?L4U +ii 03, 320-334.
Lncas, Iocri L. Jr., 970, Lconomciric Iolicy Lvalnaiion: A Criiiqnc @h?i}i
+LUit|ih L?uihi?Ui 5ihit L? M*U L*U) , 9-40.
Lncas, Iocri L. Jr. ano Nancy L. Siokcy, 983, oncy ano Inicrcsi in a Casl-in-
Aovancc Lconomy, ,UL?L4i|hU@ , 49-3.
Lncas, Iocri L. Jr. ano iclacl Woooloro, 994, Ical Lnccis ol onciary Slocks in
an Lconomy Wiil Scqncniial Inrclascs, annscripi, Univcrsiiy ol Clicago.
Lncas, Iocri L. Jr., 990 onciary Ncniraliiy, Nocl prizc lccinrc mannscripi, Uni-
vcrsiiy ol Clicago.
ankiw, N. Grcgory, Lo., 994, L?i|@h) L*U) Clicago: Univcrsiiy ol Clicago prcss.
Iomcr, Davio H. ano Clrisiina D. Iomcr, 994, Wlai Lnos Icccssions in Sian-
lcy Fisclcr ano Jnlio J. Ioicmcrg, Los., 994 ,+ @UhLiUL?L4Ut ??@*c
Camriogc: IJ Ircss, 3-7.
Ioicmcrg, Jnlio J. 994 Iriccs ano Onipni: An Lmpirical Analysis Lasco on a Siicky
Iricc oocl, Working papcr, assaclnsciis Insiiinic ol Jcclnology.
Ioicmcrg. Jnlio J., 984, A onciary Lqnilirinm wiil Jransaciions Cosis, aLh?@*
Lu L*|U@* ,UL?L4) 92, 40-8.
28
Ioicmcrg, Jnlio J. 982 Siicky Iriccs in ilc Uniico Siaics, aLh?@* Lu L*|U@*
,UL?L4) 90, 87-2.
Sargcni, Jlomas J., 970, Oscrvaiional Lqnivalcncc ol Nainral ano Unnainral raic
Jlcorics ol acrocconomics, aLh?@* Lu L*|U@* ,UL?L4) 84 .
Sargcni, Jlomas J., 980, +@|L?@* ,TiU|@|L?t @?_ W?@|L?c Ncw York: Harpcr ano
Iow.
Sargcni, Jlomas J., 987, @UhLiUL?L4U AiLh)c Orlanoo: Acaocmic Ircss.
Sargcni, Jlomas J., ano Ncil Wallacc, 97, Iaiional Lxpcciaiions, ilc Opiimal on-
ciary Insirnmcni ano ilc Opiimal oncy Snpply Inlc, aLh?@* Lu L*|U@* ,UL?
L4) 83, 24-4.
Sirongin, Sicvcn 992 Jlc Iocniicaiion ol onciary Iolicy Disinranccs: Lxplaining
ilc Liqnioiiy Inzzlc Fcocral Icscrvc Lank ol Clicago Working Iapcr WI-92-27.
Sims, Clrisioplcr A., 992, Inicrprciing ilc macrocconomic iimc scrics lacis: Jlc
cnccis ol monciary policy, ,hLTi@? ,UL?L4U +ii 30,97-000.
Jaylor, Joln L., 979, Lsiimaiion ano Conirol ol a acrocconomic oocl wiil Iaiional
Lxpcciaiions, ,UL?L4i|hU@ 47, 207-280.
29
. TTi?_
Jlis appcnoix snmmarizcs ilc spccicaiion ol ilc 2 ano Fcocral Fnnos VAI prcscnico
in Fignrc ano ilc asis ol all ilc oilcr calcnlaiions. For lnrilcr ociails, inclnoing ilc
long spccicaiion scarcl ilai lco io ilcsc csi casc VAIs, sianoaro crrors, ano so
loril, scc Coclranc (994a). Jlc oaia ano all programs nsco in ilis papcr arc availalc
via anonymons lip lrom lip-nancc-gs.nclicago.con, in ,pn,coclranc,vars.
Loil VAIs nsc qnaricrly oaia, 9:-92:4. Jlc oaia nsco in ilc 2 VAI arc, wiil
ciiiasc coocs in parcnilcscs, m2 = log 2 (F2): n = lcocral lnnos raic (FYFF),
qnaricrly avcragc: cns = log ol nononralcs scrviccs consnmpiion (GCNQGCSQ)
0.0 iimcs govcrnmcni pnrclascs (GGLQ): y = log GDI (GDIQ): p = log GDI ocnaior
(GDID). I rnn ilc 2 VAI wiil iwo coinicgraiing vcciors, m2-y-p ano y-c. I rnn ilc
VAI in crror corrcciion lorm wiil lonr lags. For cxamplc ilc rsi linc is
^62
|n
= @
f
@

(62
|
+
|
R
|
) @
2
(+
|
S?r
|
)

e
[
'
K

^62
|3

e
[
'
S

ss
|3

e
[
'
_

^S?r
|3

e
[
'
e

^+
|3

e
[
'
e

^R
|3
0
|n
Jlc crrors arc Clolcski orilogonalizco in ilc givcn orocr. Lqnivalcnily, no cnrrcni vari-
alcs occnr in ilc ^62 cqnaiion, cnrrcni ^62 appcas in ilc ss cqnaiion ano so loril.
Jlc impnlsc rcsponsc lnnciion grapls ilc implco rcsponsc ol ilc log *ii*t ol all varialcs
cxccpi ss.
Jlc varialcs nsco in ilc ss VAI arc c = log consnmpiion ol nononralcs scrviccs
(GCNQ GCSQ), y = log privaic GDI, or GDI lcss govcrnmcni pnrclascs (GDIQ-
GGLQ), p = log GDI ocnaior (GDID), cp = log scnsiiivc commooiiics pricc inocx nsco
in Clrisiiano,Liclcnanm ano Lvans (99), provioco y Clarlcs Lvans, m = log ol
(F) ano n = qnaricrly avcragc ol lcocral lnnos raic (FYFF). I rnn ilc VAI in log
lcvcls wiil lonr lags. Jlc slocks arc orilogonalizco in ilc givcn orocr.
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Inclnoing govcrnmcni pnrclascs as aovc lclps io ocnc a siaiionary consnmpiion,onipni
raiio ano lcncc improvcs ilc long-rnn propcriics ol ilc VAIs. Govcrnmcni pnrclascs
lavc incrcasco as a slarc ol GDI ovcr ilc posiwar pcrioo. Assigning 0.0 ol govcrnmcni
pnrclascs io consnmpiion, or iaking ilc raiio ol consnmpiion io privaic GDI rcsnlis in
a morc siaiionary consnmpiion,onipni raiio. Jlis is a rcncmcni, ilc rcsnlis arc noi
orasiically clangco il onc omiis ilc govcrnmcni pnrclascs.
3
FIGUILS WIJH CAIJIONS
Fignrc : Uhvsrqvhv wr prqhwdu| vkrfnv lq wzr YDUv1 Krul}rqwdo d{lv lq |hduv/
yduldeohv duh 433-orjv h{fhsw lq shufhqw1 Wrs sdqho= uhvsrqvh wr P5 vkrfnv 1
Erwwrp sdqho= uhvsrqvh wr vkrfnv1 Vhh wkh dsshqgl{ iru ghwdlov rq wkh YDU
vshflfdwlrq dqg hvwlpdwlrq
Fignrc 2: P5 dqg rxwsxw uhvsrqvhv iurp P5 YDU ri jxuh 4/ sorwwhg rq vdph
vfdoh1
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Fignrc 3: Rxwsxw hhfwv ri wzr prqhwdu| h{shulphqwv/ xqghu ydulrxv dvvxpswlrqv
derxw wkh hhfwv ri dqwlflsdwhg yv1 xqdqwlflsdwhg prqh|1 Fdofxodwhg iurp P5 YDU1
Fignrc 4: Odj sro|qrpldo d

+O, lqihuuhg iurp p5 lpsxovh0uhvsrqvh ixqfwlrq xvlqj

vwlfn| sulfh prgho1 @ sulfh vwlfnlqhvv sdudphwhu1
33
Fignrc : Rxwsxw dqg sulfh uhvsrqvhv wr prqhwdu| h{shulphqwv lq vwlfn| sulfh
prgho/ xvlqj p5 YDU lpsxovh0uhvsrqvh ixqfwlrq1 Vwlfnlqhvv sdudphwhu @ 3=;1
Fignrc 0: Rxwsxw hhfwv ri wzr prqhwdu| h{shulphqwv/ xqghu ydulrxv dvvxpswlrqv
derxw wkh hhfwv ri dqwlflsdwhg yv1 xqdqwlflsdwhg prqh|1 Fdofxodwhg iurp ihghudo
ixqgv YDU1
34
FIGUILS WIJHOUJ CAIJIONS.
Jlcsc arc cxacily ilc samc gnrcs, wiiloni accompanying capiions. I inclnoc ilcm in
casc ilis lormai is casicr lor yon io work wiil. Iclcr io ilc aovc gnrcs wiil capiions
io scc wlicl gnrc gocs wlcrc.
3
30
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