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This paper argues that, in studying the monetary policy
transmission process, more emphasis should be given to the
systematic portion of policy behavior and correspondingly less
to random shocks basically because shocks account for a very
small fraction of policy-instrument variability. Analysis of the
effects of the systematic part of policy requires structural
modelling, rather than VAR procedures, because the latter do not
give rise to behavioral relationships that can plausibly be
regarded as policy-invariant. By use of an illustrative open-
economy structural model based on optimizing analysis, and
considering variants, the paper characterizes the effects of
policy parameter settings by means of impulse response functions
and root-mean-square statistics for target errors. Different
models give different answers to questions about the effects of
systematic policy, so procedures for scrutinizing model
specification are essential. In this regard, it is argued that
vector autocorrelation functions, augmented by variance
statistics for each of a model's variables, seem more promising
than impulse response functions because the latter require shock
identification, which is inherently a difficult process.
Word Count: 172
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