This paper proposes a simple explanation for the frequent appearance of a price puzzle in VARs designed for monetary … policy analysis. It suggests that the best method of solving the puzzle implies a close connection between theory and … misspecified VAR are optimal. When the model is tested on US data, all predictions are supported. -- Price puzzle ; monetary policy …

-through ; exchange rate volatility ; inflation targeting ; monetary policy ; small open economy …The central bank's optimal reaction to foreign and domestic shocks is analyzed in an inflation targeting model allowing … that the interest rate response to foreign shocks is smaller when pass-through is low. Second, the inflation …