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Monetary policy in an estimated stochastic dynamic general equilibrium model of the Euro area

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Author Info
Frank Smets
Raf Wouters

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Abstract

This paper, first, develops and estimates a stochastic dynamic general equilibrium (SDGE) model with sticky prices and wages for the euro area. The model incorporates various other features such as habit formation, costs of adjustment in capital accumulation and variable capacity utilisation and is estimated using seven key macro-economic variables: GDP, consumption, investment, prices, real wages, employment and the nominal interest rate. The introduction of eight orthogonal structural shocks (including productivity, labour supply, preference, cost-push and monetary policy shocks) allows for an empirical investigation of the effects of such shocks and of their contribution to business cycle fluctuations in the euro area. For example, it is found that productivity shocks account for only 10 percent of the long run variance in output. Using the estimated model, the paper then analyses the output (real interest rate) gap, defined as the difference between the actual and the flexible-price level of output (real interest rate). Finally, the estimated model is also used to analyse optimal monetary policy.

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Article provided by Federal Reserve Bank of San Francisco in its journal Proceedings.

Volume (Year): (2002)
Issue (Month): Mar ()
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Handle: RePEc:fip:fedfpr:y:2002:i:mar:x:2

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Keywords: Monetary policy;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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  5. Woodford, Michael, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(0), pages 1-35, Supplemen. [Downloadable!] (restricted)
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  6. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December. [Downloadable!] (restricted)
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  7. Neiss, Katharine & Nelson, Edward, 2001. "The Real Interest rate Gap as an Inflation Indicator," CEPR Discussion Papers 2848, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  15. Peter N. Ireland, 2001. "Money's Role in the Monetary Business Cycle," NBER Working Papers 8115, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers 98-03, C.V. Starr Center for Applied Economics, New York University. [Downloadable!]
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  21. Jeff Fuhrer, 2000. "Optimal Monetary Policy In A Model With Habit Formation," Computing in Economics and Finance 2000 306, Society for Computational Economics.
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  26. Casares, M., 2001. "Business Cycle and Monetary Policy Analysis in a Structural Sticky-Price of the Euro Area," Papers 49, Quebec a Montreal - Recherche en gestion.
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  28. Miguel Casares, 2001. "Business Cycle and Monetary Policy Analysis in a Structural Sticky- Price Model of The Euro Area," Documentos de Trabajo - Lan Gaiak Departamento de Economía - Universidad Pública de Navarra 0109, Departamento de Economía - Universidad Pública de Navarra. [Downloadable!]
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  29. McCallum, Bennett T. & Nelson, Edward, 1999. "Nominal income targeting in an open-economy optimizing model," Journal of Monetary Economics, Elsevier, vol. 43(3), pages 553-578, June. [Downloadable!] (restricted)
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  30. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," NBER Working Papers 8403, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  31. Jordi Gali, 2002. "New Perspectives on Monetary Policy, Inflation, and the Business Cycle," NBER Working Papers 8767, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  32. Gabriel Fagan & Jérôme Henry & Ricardo Mestre, 2001. "An area-wide model (AWM) for the euro area," Working Paper Series 42, European Central Bank. [Downloadable!]
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  34. Amato, Jeffery D. & Laubach, Thomas, 2003. "Rule-of-thumb behaviour and monetary policy," European Economic Review, Elsevier, vol. 47(5), pages 791-831, October. [Downloadable!] (restricted)
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Seonghoon Cho & Antonio Moreno, 2003. "A Structural Estimation and Interpretation of the New Keynesian Macro Model," Faculty Working Papers 14/03, School of Economics and Business Administration, University of Navarra. [Downloadable!]
  2. Gianluca Benigno & Christoph Thoenissen, 2003. "Equilibrium Exchange Rates and Supply-Side Performance," Economic Journal, Royal Economic Society, vol. 113(486), pages C103-C124, March. [Downloadable!] (restricted)
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  3. Pau Rabanal & Juan F. Rubio-Ramírez, 2001. "Nominal versus real wage rigidities: A Bayesian approach," Working Paper 2001-22, Federal Reserve Bank of Atlanta. [Downloadable!]
  4. Francesco Lippi & Stefano Neri, 2004. "Information variables for monetary policy in a small structural model of the euro area," Temi di discussione (Economic working papers) 511, Bank of Italy, Economic Research Department. [Downloadable!]
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  5. Frédéric Karamé & Lise Patureau & Thepthida Sopraseuth, 2003. "Limited participation and exchange rate dynamics : does theory meet the data ?," Cahiers de la Maison des Sciences Economiques v04013, Université Panthéon-Sorbonne (Paris 1). [Downloadable!]
    Other versions:
  6. Edward Nelson & Kalin Nikolov, . "Monetary policy and stagflation in the UK," Bank of England working papers 155, Bank of England. [Downloadable!]
    Other versions:
  7. Fabio Milani, 2005. "Adaptive Learning and Inflation Persistence," Working Papers 050607, University of California-Irvine, Department of Economics. [Downloadable!]
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  8. Paul R. Bergin, 2004. "How Well Can the New Open Economy Macroeconomics Explain the Exchange Rate and Current Account?," NBER Working Papers 10356, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  9. Fabio Milani, 2005. "A Bayesian DSGE Model with Infinite-Horizon Learning: Do "Mechanical" Sources of Persistence Become Superfluous?," Working Papers 060703, University of California-Irvine, Department of Economics. [Downloadable!]
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  10. Boris Hofmann & Matthias Paustian, 2005. "The Persistence and Rigidity of wages and prices," Money Macro and Finance (MMF) Research Group Conference 2005 71, Money Macro and Finance Research Group. [Downloadable!]
  11. Katharine Neiss & Edward Nelson, 2002. "Inflation dynamics, marginal cost, and the output gap: evidence from three countries," Proceedings, Federal Reserve Bank of San Francisco, issue Mar. [Downloadable!]
  12. Nelson, Edward, 2001. "UK Monetary Policy 1972-97: A Guide Using Taylor Rules," CEPR Discussion Papers 2931, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  13. Francesco Lippi & Stefano Neri, 2004. "Information variables for monetary policy in a small structural model," DNB Staff Reports (discontinued) 120, Netherlands Central Bank. [Downloadable!]
  14. Fabio Milani, 2005. "Learning, Monetary Policy Rules, and Macroeconomic Stability," Macroeconomics 0508019, EconWPA. [Downloadable!]
    Other versions:
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