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Which Method Should the Central Bank Choose to Estimate the Model Economy? A Korean Monetary Policy Example

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  • Jangryoul Kim
  • Gieyoung Lim

Abstract

To understand how the macro economy evolves, the central bank has two options in choosing how to estimate the economic model against actual data: one is to estimate each sector of the model piece-by-piece, and the other is to estimate the whole model altogether. This paper demonstrates the advantage for the central bank of estimating the whole model in terms of the estimation accuracy and the robustness of the resulting policy recommendations. For that aim, we construct a macro model for the monetary policy analysis of the Korean economy and estimate the model via the system approach and single-equation approach. We evaluate the data fits of the two estimation results and show that the fit of the system approach is far better than the other and comparable to other methods such as vector autoregressions. It is also shown that, if the two estimated models are equally likely, conducting the policy tailored for the model estimated by the system approach delivers better stabilization results for the Korean economy.

Suggested Citation

  • Jangryoul Kim & Gieyoung Lim, 2008. "Which Method Should the Central Bank Choose to Estimate the Model Economy? A Korean Monetary Policy Example," Global Economic Review, Taylor & Francis Journals, vol. 37(4), pages 487-495.
    • Handle: RePEc:taf:glecrv:v:37:y:2008:i:4:p:487-495
    DOI: 10.1080/12265080802480985
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    References listed on IDEAS

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    1. Andrew Filardo, 2004. "Monetary policy and asset price bubbles: calibrating the monetary policy trade-offs," BIS Working Papers 155, Bank for International Settlements.
    2. Chang-Jin Kim & Charles R. Nelson, 1999. "State-Space Models with Regime Switching: Classical and Gibbs-Sampling Approaches with Applications," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262112388, December.
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