The standard Dynamic New-Keynesian (DNK) model predicts an /immediate/ response of inflation and the business cycle to a monetary policy shock. In contrast, the identification strategy typically employed in structural VARs assumes /delayed/ responses. Calstrom, Fuerst, and Paustian (2009, /Journal of Monetary Economics/) show that, /theoretically/, the Cholesky identification scheme can severely distort the VAR impulse response functions, producing price puzzles and muted responses of inflation and the output gap to monetary shocks. We assess the empirical relevance of CFP's conjecture with an estimated DNK of the U.S. economy.
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