I built a model based on Iacoviello(2005),adding a bank sector. When I do the Variance Decomposition, I got the result that the impact of monetary policy shock on output and inflation more than 97%, however the impact of technology shocks less than 3%. Is this result correct? Or perhaps my model has some mistakes?
thanks for reading.
That is hard to tell without detailed knowledge of the model, but given the evidence from other estimated models, your result is rather unusual and might be the result of a mistake (unless you have a good economic intuition why monetary policy shocks should suddenly be so important for business cycles)
dear Jpfeifer ,
thanks for your replying. I think I need to check my parameter calibration, and modify my model. Almost each equation include the interest rate .So I guess this may be the reason why monetary policy shocks become so important in my model.