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Macroeconometric equivalence, microeconomic dissonance, and the design of monetary policy

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Author Info

  • Levin, Andrew T.
  • David López-Salido, J.
  • Nelson, Edward
  • Yun, Tack

Abstract

Macroeconometric equivalence means that estimates of DSGE models using first-order approximations to equilibrium conditions fail to distinguish between alternative preference/technology configurations. Microeconomic dissonance means that the underlying microeconomic differences between ostensibly equivalent models become important when optimal monetary policy is derived. The relevance of these concepts is established by analysis of optimal monetary policy using a small-scale New Keynesian model. Microeconomic and financial datasets are promising tools with which to overcome the equivalence/dissonance problem.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 55 (2008)
Issue (Month): Supplement 1 (October)
Pages: S48-S62

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Handle: RePEc:eee:moneco:v:55:y:2008:i:s1:p:s48-s62

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Web page: http://www.elsevier.com/locate/inca/505566

Related research

Keywords: Macroeconometric equivalence Alternative microfoundations Ramsey optimal monetary policy Welfare analysis;

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Citations

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Cited by:
  1. Tack Yun & Andrew Levin, 2011. "Reconsidering the Microeconomic Foundations of Price-Setting Behavior," 2011 Meeting Papers 424, Society for Economic Dynamics.
  2. Andrew T. Levin, 2008. "Commentary on "Optimal monetary policy under uncertainty: a Markov jump-linear-quadratic approach"," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 301-306.
  3. Richard Dennis, 2008. "Timeless perspective policymaking: When is discretion superior?," Working Paper Series 2008-21, Federal Reserve Bank of San Francisco.
  4. Glenn D. Rudebusch & Eric T. Swanson, 2008. "The bond premium in a DSGE model with long-run real and nominal risks," Working Paper Research 143, National Bank of Belgium.
  5. Guido Ascari & Argia M. Sbordone, 2013. "The macroeconomics of trend inflation," Staff Reports 628, Federal Reserve Bank of New York.
  6. Pontiggia, D., 2012. "Optimal long-run inflation and the New Keynesian model," Journal of Macroeconomics, Elsevier, vol. 34(4), pages 1077-1094.
  7. Pierpaolo Benigno & Luigi Paciello, 2010. "Monetary Policy, Doubts and Asset Prices," NBER Working Papers 16386, National Bureau of Economic Research, Inc.
  8. Engin Kara & Jasmin Sin, 2013. "Liquidity, Quantitative Easing and Optimal Monetary Policy," Bristol Economics Discussion Papers 13/635, Department of Economics, University of Bristol, UK.
  9. Fernando M. Duarte, 2013. "Inflation risk and the cross section of stock returns," Staff Reports 621, Federal Reserve Bank of New York.
  10. Engin Kara, 2011. "Understanding and Modelling Reset Price Inflation," Bristol Economics Discussion Papers 11/623, Department of Economics, University of Bristol, UK.
  11. José Dorich & Michael K. Johnston & Rhys R. Mendes & Stephen Murchison & Yang Zhang, 2013. "ToTEM II: An Updated Version of the Bank of Canada’s Quarterly Projection Model," Technical Reports 100, Bank of Canada.

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