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Estimation of Monetary Policy Preferences in a Forward-Looking Model: A Bayesian Approach

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  • Pelin lbas

    (Research Department, Norges Bank)

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    Abstract

    In this paper we adopt a Bayesian approach toward the estimation of monetary policy preference parameters in a general equilibrium framework for the euro area. We assume that monetary policy authorities optimize an intertemporal quadratic loss function under commitment and study two alternative specifications of the loss function. The first specification includes inflation, output gap, and the interest rate differential as targets. The second loss function includes an additional wage-inflation target. The weights assigned to target variables - i.e., monetary policy preferences - are estimated jointly with the structural model parameters. The results imply that inflation variability remains the main concern of optimal monetary policy. Interest rate smoothing and the output gap appear to be, to a lesser extent, important target variables as well. Due to the time-inconsistency problem under commitment, we propose to initialize the estimates by a presample period of forty quarters. This allows us to approach, empirically, the timeless-perspective framework.

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    Bibliographic Info

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 6 (2010)
    Issue (Month): 3 (September)
    Pages: 169-209

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    Handle: RePEc:ijc:ijcjou:y:2010:q:3:a:6

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    1. Del Negro, Marco & Schorfheide, Frank, 2007. "Forming Priors for DSGE Models (and How It Affects the Assessment of Nominal Rigidities)," CEPR Discussion Papers 6119, C.E.P.R. Discussion Papers.
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    Cited by:
    1. Chen, Xiaoshan & Kirsanova, Tatiana & Leith, Campbell, 2013. "How Optimal is US Monetary Policy?," Stirling Economics Discussion Papers 2013-05, University of Stirling, Division of Economics.
    2. Kirsanova, Tatiana & le Roux, Stephanus, 2013. "Commitment vs. Discretion in the UK: An Empirical Investigation of the Monetary and Fiscal Policy Regime," SIRE Discussion Papers 2013-52, Scottish Institute for Research in Economics (SIRE).
    3. Andreza Aparecida Palma & Marcelo Savino Portugal, 2014. "Preferences Of The Central Bank Of Brazil Under The Inflation Targeting Regime: Estimation Using A Dsge Model For A Small Open Economy," Anais do XLI Encontro Nacional de Economia [Proceedings of the 41th Brazilian Economics Meeting] 055, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].

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