Can VARs be used to analyze the effects of monetary policy?
What will be an ideal response?
Because of the Lucas critique, VARs might be thought to be unable to analyze the effects of monetary policy. But Sims argues that as long as the policy has been used before, it will be reflected in the VAR, and thus the VAR can be used to analyze the policy. In addition, a structural VAR may be used to analyze policy, without the problem of the Lucas critique.
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