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Comparing monetary policy rules in CEE economies: A Bayesian approach

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  • Caraiani, Petre

Abstract

Using the Bayesian approach, a small open economy DSGE model was estimated using a sample of quarterly data for three Central and Eastern Europe economies, Czech Republic, Hungary and Poland. The hypothesis that central banks react to exchange rate movements was tested using posterior odds ratio. For these economies, evidence was found that central banks reacted to exchange rate changes. Evidence of similar monetary policy characterized by moderate or low gradualism as well as an active and conservative monetary policy was also found, for the selected countries. When a richer DSGE model featuring habit formation and imperfect pass-through is estimated, the results are generally similar. The inclusion of exchange rate in Taylor rule can also drastically change the dynamics of inflation and output following certain shocks.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 32 (2013)
Issue (Month): C ()
Pages: 233-246

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Handle: RePEc:eee:ecmode:v:32:y:2013:i:c:p:233-246

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: New Keynesian models; Small open economy; Monetary policy; Taylor rules; Bayesian methods;

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References

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  1. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  2. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  3. Jordi Gal� & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Review of Economic Studies, Oxford University Press, vol. 72(3), pages 707-734.
  4. Alejandro Justiniano & Bruce Preston, 2009. "Monetary policy and uncertainty in an empirical small open economy model," Working Paper Series WP-09-21, Federal Reserve Bank of Chicago.
  5. Caraiani, Petre, 2011. "Comparing Monetary Policy Rules in the Romanian Economy: A New Keynesian Approach," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 30-46, December.
  6. Eschenhof, Sabine, 2009. "Comparing Monetary Policy Rules in a Small Open Economy Framework: An Empirical Analysis Using Bayesian Techniques," Darmstadt Discussion Papers in Economics 40392, Darmstadt Technical University, Department of Business Administration, Economics and Law, Institute of Economics (VWL).
  7. Lubik, Thomas A. & Schorfheide, Frank, 2007. "Do central banks respond to exchange rate movements? A structural investigation," Journal of Monetary Economics, Elsevier, vol. 54(4), pages 1069-1087, May.
  8. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
  9. Ramon Maria-Dolores, 2005. "Monetary Policy Rules In Accession Countries to EU: Is the Taylor rule a pattern?," Economics Bulletin, AccessEcon, vol. 5(7), pages 1-16.
  10. repec:ebl:ecbull:v:5:y:2005:i:7:p:1-16 is not listed on IDEAS
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