New Evidence on Monetary Transmission : Interest Rate Versus Inflation Target Shocks

We present new empirical evidence on monetary transmission by incorporating two types of shocks -- a standard temporary interest rate shock and a persistent inflation target shock. In an estimated DSGE model under imperfect information, where agents may be unable to distinguish these shocks, we find delayed Neo-Fisherian behavior in response to the persistent shock: interest rate and inflation increase, but with a lag. In an empirical VAR model that accounts for such uncertainty in identifying assumptions, we similarly find evidence for positive co-movement of interest rates and inflation in the short aftermath of the persistent shock, however, not on impact