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New-Keynesian Models and Monetary Policy: A Reexamination of the Stylized Facts

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Author Info

  • Söderström, Ulf

    ()
    (Sveriges Riksbank)

  • Söderlind, Paul

    ()
    (Dept. of Finance, Stockholm School of Economics)

  • Vredin, Anders

    ()
    (Sveriges Riksbank)

Abstract

Using an empirical New-Keynesian model with optimal discretionary monetary policy, we calibrate key parameters - the central bank's preference parameters; the degree of forward-looking behavior in the determination of inflation and output; and the variances of inflation and output shocks - to match some broad characteristics of U.S. data. Our preferred parameterizations all imply a small concern for output stability but a large preference for interest rate smoothing, and a small degree of forward-looking behavior in price-setting but a large degree of forward-looking in the determination of output. We provide some intuition for these results and discuss their consequences for practical monetary policy analysis.

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Bibliographic Info

Paper provided by Stockholm School of Economics in its series Working Paper Series in Economics and Finance with number 511.

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Length: 31 pages
Date of creation: 18 Sep 2002
Date of revision: 15 Aug 2003
Handle: RePEc:hhs:hastef:0511

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Postal: The Economic Research Institute, Stockholm School of Economics, P.O. Box 6501, 113 83 Stockholm, Sweden
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Keywords: Interest rate smoothing; central bank objectives; forward-looking behavior;

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References

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  1. Svensson, Lars E.O. & Rudebusch , Glenn, 1998. "Policy Rules for Inflation Targeting," Seminar Papers, Stockholm University, Institute for International Economic Studies 637, Stockholm University, Institute for International Economic Studies.
  2. Jeff Fuhrer & George Moore, 1993. "Inflation persistence," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 93-17, Board of Governors of the Federal Reserve System (U.S.).
  3. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 37(4), pages 1661-1707, December.
  4. Goodfriend, Marvin, 1991. "Interest rates and the conduct of monetary policy," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 34(1), pages 7-30, January.
  5. Woodford, Michael, 2000. "Optimal Monetary Policy Inertia," Seminar Papers, Stockholm University, Institute for International Economic Studies 666, Stockholm University, Institute for International Economic Studies.
  6. Jeremy Rudd & Karl Whelan, 2001. "New tests of the New-Keynesian Phillips curve," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2001-30, Board of Governors of the Federal Reserve System (U.S.).
  7. Efrem Castelnuovo, 2003. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Working Papers, Fondazione Eni Enrico Mattei 2003.6, Fondazione Eni Enrico Mattei.
  8. Svensson, Lars E O, 1995. "Optimal Inflation Targets, 'Conservative' Central Banks, and Linear Inflation Contracts," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1249, C.E.P.R. Discussion Papers.
  9. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0233, National Bureau of Economic Research, Inc.
  10. Glenn D. Rudebusch, 1999. "Is the Fed too timid? Monetary policy in an uncertain world," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 99-05, Federal Reserve Bank of San Francisco.
  11. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues, Federal Reserve Bank of Chicago WP-97-18, Federal Reserve Bank of Chicago.
  12. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, Elsevier, vol. 44(2), pages 195-222, October.
  13. Jondeau, E. & Le Bihan, H., 2001. "Testing for a Forward-Looking Phillips Curve. Additional Evidence from European and US Data," Working papers, Banque de France 86, Banque de France.
  14. Roberts John M., 2005. "How Well Does the New Keynesian Sticky-Price Model Fit the Data?," The B.E. Journal of Macroeconomics, De Gruyter, De Gruyter, vol. 5(1), pages 1-39, September.
  15. Bennett T. McCallum & Edward Nelson, 1997. "An Optimizing IS-LM Specification for Monetary Policy and Business Cycle Analysis," NBER Working Papers 5875, National Bureau of Economic Research, Inc.
  16. Alex Cukierman, 1989. "Why does the Fed smooth interest rates?," Proceedings, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, pages 111-157.
  17. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  18. Söderlind, Paul, 1998. "Solution and Estimation of RE Macromodels with Optimal Policy," Working Paper Series in Economics and Finance, Stockholm School of Economics 256, Stockholm School of Economics.
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