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Can a Calibrated New-Keynesian Model of Monetary Policy Fit the Facts?

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Author Info

  • Söderström, Ulf

    ()
    (Research Department, Central Bank of Sweden)

  • Söderlind, Paul

    ()
    (Department of Finance)

  • Vredin, Anders

    ()
    (Research Department, Central Bank of Sweden)

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 Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 140.

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Length: 31 pages
Date of creation: 01 Sep 2002
Date of revision:
Publication status: Published in Scandinavian Journal of Economics, 2005, pages 521-546.
Handle: RePEc:hhs:rbnkwp:0140

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Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
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Web page: http://www.riksbank.com/
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Keywords: Interest rate smoothing; central bank objectives; forward-looking behavior;

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References

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  17. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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  20. Söderlind, Paul, 1998. "Solution and Estimation of RE Macromodels with Optimal Policy," Working Paper Series in Economics and Finance 256, Stockholm School of Economics.
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  22. Jondeau, E. & Le Bihan, H., 2001. "Testing for a Forward-Looking Phillips Curve. Additional Evidence from European and US Data," Working papers 86, Banque de France.
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Citations

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Cited by:
  1. Zhao, Mingjun, 2007. "Monetary policy under misspecified expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 31(4), pages 1278-1299, April.
  2. Mash, Richard, 2002. "New Keynesian Microfoundations Revisited: A Generalised Calvo-Taylor Model and the Desirability of Inflation vs. Price Level Targeting," Royal Economic Society Annual Conference 2002 138, Royal Economic Society.
  3. Richard Mash, 2003. "New Keynesian Microfoundations Revisited: A Calvo-Taylor-Rule-of-Thumb Model and Optimal Monetary Policy Delegation," Economics Series Working Papers 174, University of Oxford, Department of Economics.

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