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Towards a monetary policy evaluation framework

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Author Info
Stéphane Adjemian () (Université du Maine, GAINS & CEPREMAP. Contact address: Facultéde Droit et de Sciences Économiques, 72085 LE MANS Cedex 9, France.)
Matthieu Darracq Pariès () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)
Stéphane Moyen () (European Central Bank, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.)

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Abstract

Advances in the development of Dynamic Stochastic General Equilibrium (DSGE) models towards medium-scale structural frameworks with satisfying data coherence have considerably enhanced the range of analytical tools well-suited for monetary policy evaluation. The present paper intends to make a step forward in this direction: using US data over the Volker-Greenspan sample, we perform a DGSE-VAR estimation of a medium-scale DSGE model very close to Smets and Wouters [2007] specification, where monetary policy is set according to a Ramsey-planner decision problem. Those results are then contrasted with the DSGE-VAR estimation of the same model featuring a Taylortype interest rate rule. Our results show in particular that the restrictions imposed by the welfare-maximizing Ramsey policy deteriorates the empirical performance with respect to a Taylor rule specification. However, it turns out that, along selected conditional dimensions, and notably for productivity shocks, the Ramsey policy and the estimated Taylor rule deliver similar economic propagation. JEL Classification: E4, E5, F4.

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Paper provided by European Central Bank in its series Working Paper Series with number 942.

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Length: 47 pages
Date of creation: Sep 2008
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Handle: RePEc:ecb:ecbwps:20080942

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Related research
Keywords: DSGE models; Optimal monetary policy; Bayesian estimation.;

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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. Frank Smets & Matthieu Darracq Pariès & Stéphane Adjemian, 2008. "A quantitative perspective on optimal monetary policy cooperation between the US and the euro area," Working Paper Series 884, European Central Bank. [Downloadable!]
  2. Gali, Jordi & Lopez-Salido, J. David & Valles, Javier, 2003. "Technology shocks and monetary policy: assessing the Fed's performance," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 723-743, May. [Downloadable!] (restricted)
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  3. Salemi, Michael K., 2006. "Econometric Policy Evaluation and Inverse Control," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(7), pages 1737-1764, October. [Downloadable!] (restricted)
  4. Andrew T. Levin & Alexei Onatski & John C. Williams & Noah Williams, 2005. "Monetary policy under uncertainty in micro-founded macroeconometric models," Working Papers in Applied Economic Theory 2005-15, Federal Reserve Bank of San Francisco. [Downloadable!]
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  5. Michael Dotsey & Robert G. King, 2005. "Implications of state-dependent pricing for dynamic macroeconomic models," Working Papers 05-2, Federal Reserve Bank of Philadelphia. [Downloadable!]
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  6. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," Levine's Bibliography 506439000000000394, UCLA Department of Economics. [Downloadable!]
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  7. Richard Dennis, 2006. "The policy preferences of the US Federal Reserve," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 21(1), pages 55-77. [Downloadable!]
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  8. Raf Wouters & Frank Smets, 2005. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 20(2), pages 161-183. [Downloadable!]
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  9. Del Negro, Marco & Schorfheide, Frank & Smets, Frank & Wouters, Rafael, 2007. "On the Fit of New Keynesian Models," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 123-143, April. [Downloadable!] (restricted)
  10. Marco Del Negro & Frank Schorfheide, 2004. "Priors from General Equilibrium Models for VARS," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 45(2), pages 643-673, 05. [Downloadable!] (restricted)
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  11. Favero, Carlo A & Rovelli, Riccardo, 2003. " Macroeconomic Stability and the Preferences of the Fed: A Formal Analysis, 1961-98," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 545-56, August.
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  12. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, 09. [Downloadable!] (restricted)
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  13. Matthieu Darracq Pariès & Stéphane Adjemian & Stéphane Moyen, 2007. "Optimal monetary policy in an estimated DSGE for the euro area," Working Paper Series 803, European Central Bank. [Downloadable!]
  14. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules And Macroeconomic Stability: Evidence And Some Theory," The Quarterly Journal of Economics, MIT Press, vol. 115(1), pages 147-180, February. [Downloadable!] (restricted)
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  15. Sanvi Avouyi-Dovi & Julien Matheron, 2007. "Technology Shocks and Monetary Policy: Revisiting the Fed's Performance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 471-507, 03. [Downloadable!] (restricted)
  16. Aubhik Khan & Robert G. King & Alexander L. Wolman, 2003. "Optimal Monetary Policy," Review of Economic Studies, Blackwell Publishing, vol. 70(4), pages 825-860, October. [Downloadable!] (restricted)
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  17. Miles S. Kimball & Michael Woodford, 1994. "The quantitative analysis of the basic neomonetarist model," Proceedings, Federal Reserve Bank of Cleveland, pages 1241-1289.
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  18. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June. [Downloadable!] (restricted)
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  19. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
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  20. Stephanie Schmitt-Grohe & Martin Uribe, 2005. "Optimal Inflation Stabilization in a Medium-Scale Macroeconomic Model," NBER Working Papers 11854, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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. John Geweke & Gianni Amisano, 2008. "Comparing and evaluating Bayesian predictive distributions of asset returns," Working Paper Series 969, European Central Bank. [Downloadable!]
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