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Monetary Policy Shocks and Business Cycle Fluctuations in a Small Open Economy: Sweden 1986-2002

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  • Lindé, Jesper

    ()
    (Research Department, Central Bank of Sweden)

Abstract

This paper contains an empirical analysis of the dynamic effects of monetary policy on Swedish data within a framework consistent with the theoretical New-Keynesian type of small open economy models. Because of what appears to be time-varying seasonal patterns in the data, I argue that it is of crucial importance to use the annual inflation rate rather than the quarterly inflation rate in the empirical analysis. After a monetary policy shock, the impulse response functions for output and inflation display a “hump-shaped” pattern with peak effects after 1.5 - 2 years. There also seems to be considerable inertia in the real exchange rate. Sensitivity analysis suggests that the shape of the obtained impulse response functions is fairly robust with respect to the number of lags in the VAR, sample size, and the formulation of the policy rule. Also, we find evidence that foreign shocks are very important for understanding Swedish business cycles. In particular, they account for a large fraction of the lower frequency movements in output and inflation, whereas domestic shocks generate most of the high frequency movements in the data.

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Bibliographic Info

Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 153.

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Length: 39 pages
Date of creation: 01 Nov 2003
Date of revision:
Handle: RePEc:hhs:rbnkwp:0153

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Keywords: Monetary policy shocks; Impulse response functions; VAR models; New-Keynesian models; Real exchange rates; Business cycles;

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References

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  1. 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.
  2. Giordani, Paolo, 2004. "An alternative explanation of the price puzzle," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(6), pages 1271-1296, September.
  3. Tor Jacobson & Per Jansson & Anders Vredin & Anders Warne, 2001. "Monetary policy analysis and inflation targeting in a small open economy: a VAR approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 16(4), pages 487-520.
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, issue Jun.
  5. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, Elsevier, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
  6. Rudebusch, G.D., 1996. "Do Measures of Monetary Policy in a VAR Make Sense?," Papers, Banca Italia - Servizio di Studi 269, Banca Italia - Servizio di Studi.
  7. Jacobson, Tor & Jansson, Per & Vredin, Anders & Warne, Anders, 2002. "Identifying the Effects of Monetary Policy Shocks in an Open Economy," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 134, Sveriges Riksbank (Central Bank of Sweden).
  8. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, Elsevier, vol. 50(1), pages 155-183, February.
  9. Ignazio Angeloni & Anil K. Kashyap & Benoit Mojon & Daniele Terlizzese, 2003. "The Output Composition Puzzle: A Difference in the Monetary Transmission Mechanism in the Euro Area and U.S," NBER Working Papers 9985, National Bureau of Economic Research, Inc.
  10. Linde, Jesper, 2005. "Estimating New-Keynesian Phillips curves: A full information maximum likelihood approach," Journal of Monetary Economics, Elsevier, Elsevier, vol. 52(6), pages 1135-1149, September.
  11. Sims, Christopher A, 1980. "Macroeconomics and Reality," Econometrica, Econometric Society, Econometric Society, vol. 48(1), pages 1-48, January.
  12. Julio J. Rotemberg & Michael Woodford, 1999. "Interest Rate Rules in an Estimated Sticky Price Model," NBER Chapters, National Bureau of Economic Research, Inc, in: Monetary Policy Rules, pages 57-126 National Bureau of Economic Research, Inc.
  13. 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.
  14. Favara, Giovanni & Giordani, Paolo, 2009. "Reconsidering the role of money for output, prices and interest rates," Journal of Monetary Economics, Elsevier, Elsevier, vol. 56(3), pages 419-430, April.
  15. Berg, Claes & Jansson, Per & Vredin, Anders, 2004. "How Useful are Simple Rules for Monetary Policy? The Swedish Experience," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 169, Sveriges Riksbank (Central Bank of Sweden).
  16. Paolo Giordani, 2004. "Evaluating New-Keynesian Models of a Small Open Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, Department of Economics, University of Oxford, vol. 66(s1), pages 713-733, 09.
  17. Christopher A. Sims, 1992. "Interpreting the Macroeconomic Time Series Facts: The Effects of Monetary Policy," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 1011, Cowles Foundation for Research in Economics, Yale University.
  18. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  19. Canova, Fabio & Hansen, Bruce E, 1995. "Are Seasonal Patterns Constant over Time? A Test for Seasonal Stability," Journal of Business & Economic Statistics, American Statistical Association, American Statistical Association, vol. 13(3), pages 237-52, July.
  20. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
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Cited by:
  1. Söderström, Ulf, 2008. "Re-Evaluating Swedish Membership in EMU: Evidence from an Estimated Model," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 227, Sveriges Riksbank (Central Bank of Sweden).
  2. Åsberg Sommar, Per & Shahnazarian, Hovick, 2008. "Macroeconomic Impact on Expected Default Frequency," Working Paper Series, Sveriges Riksbank (Central Bank of Sweden) 219, Sveriges Riksbank (Central Bank of Sweden).

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