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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. Duarte, Margarida & Stockman, Alan C., 2005. "Rational speculation and exchange rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(1), pages 3-29, January.
  2. Malin Adolfson & Stefan Laséen & Jesper Lindé & Lars E.O. Svensson, 2011. "Optimal Monetary Policy in an Operational Medium‐Sized DSGE Model," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 43(7), pages 1287-1331, October.
  3. David Altig & Lawrence J. Christiano & Martin Eichenbaum & Jesper Linde, 2004. "Firm-specific capital, nominal rigidities and the business cycle," Working Paper Series, Federal Reserve Bank of Chicago WP-05-01, Federal Reserve Bank of Chicago.
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Cited by:
  1. Charles Engel, 2009. "Currency Misalignments and Optimal Monetary Policy: A Reexamination," NBER Working Papers 14829, National Bureau of Economic Research, Inc.
  2. Camilo E Tovar, 2008. "DSGE models and central banks," BIS Working Papers 258, Bank for International Settlements.

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