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Monetary policy trade-offs in an estimated open-economy DSGE model

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  • Adolfson, Malin
  • Laséen, Stefan
  • Lindé, Jesper
  • Svensson, Lars E.O.

Abstract

This paper studies the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank׳s estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy. Our main finding is that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 42 (2014)
Issue (Month): C ()
Pages: 33-49

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Handle: RePEc:eee:dyncon:v:42:y:2014:i:c:p:33-49

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Web page: http://www.elsevier.com/locate/jedc

Related research

Keywords: Optimal monetary policy; Instrument rules; Open-economy DSGE models; Output gap; Potential output;

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References

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  1. Giorgio Primiceri & Andrea Tambalotti & Alejandro Justiniano, 2011. "Is there a trade-off between inflation and output stabilization?," 2011 Meeting Papers 280, Society for Economic Dynamics.
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  15. Altig, David E & Christiano, Lawrence J. & Eichenbaum, Martin & Lindé, Jesper, 2005. "Firm-Specific Capital, Nominal Rigidities and the Business Cycle," CEPR Discussion Papers 4858, C.E.P.R. Discussion Papers.
  16. Malin Adolfson & Stefan Laséen & Jesper Lindé & Lars E.O. Svensson, 2011. "Optimal monetary policy in an operational medium-sized DSGE model," International Finance Discussion Papers 1023, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Charles Engel, 2011. "Currency Misalignments and Optimal Monetary Policy: A Reexamination," American Economic Review, American Economic Association, vol. 101(6), pages 2796-2822, October.
  2. Tovar, Camilo Ernesto, 2009. "DSGE Models and Central Banks," Economics - The Open-Access, Open-Assessment E-Journal, Kiel Institute for the World Economy, vol. 3(16), pages 1-31.

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