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A Bayesian VAR Model Perspective on the Lagged Effect of Monetary Policy

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Abstract
Over the last few years, the U.S. economy has experienced unusually high inflation and an unprecedented pace of monetary policy tightening. While inflation has fallen recently, it remains above target, and the economy continues to expand at a robust pace. Does the resilience of the U.S. economy imply that monetary policy has been ineffectual? Or does it reflect that policy acts with “long and variable lags” and so we haven’t yet observed the full effect of the monetary tightening that has already taken place? Using a Bayesian vector autoregressive (BVAR) model, we show that economic activity has, indeed, been substantially stronger than would have been anticipated considering the rapid policy tightening. Still, the model expects a significant slowdown in 2024-25, even though short-term interest rates are forecasted to fall.

Suggested Citation

  • Richard K. Crump & Marco Del Negro & Keshav Dogra & Pranay Gundam & Donggyu Lee & Ramya Nallamotu & Brian Pacula, 2023. "A Bayesian VAR Model Perspective on the Lagged Effect of Monetary Policy," Liberty Street Economics 20231121a, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:97346
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    File URL: https://libertystreeteconomics.newyorkfed.org/2023/11/a-bayesian-var-model-perspective-on-the-lagged-effect-of-monetary-policy/
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    More about this item

    Keywords

    forecasts; lagged effects; monetary policy;
    All these keywords.

    JEL classification:

    • E2 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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