Estimating Central Bank preferences in a small open economy: Sweden 1995-2009
AbstractInterest Rate rules are often estimated as simple reaction functions linking the policy interest rate to variables such as (forecasted) inflation and the output gap; however, the coefficients estimated with this approach are convolutions of structural and preference parameters. I propose an approach to estimate Central Bank preferences starting from the Central Bank's optimization problem within a small open economy. When we consider open economies in a regime of Inflation Targeting, the issue of the role of the exchange rate in the Monetary Policy rule becomes relevant. The empirical analysis is conducted on Sweden, to verify whether the recent stabilization of the Krona/Euro exchange rate was due to “Fear of Floating”; the results show that the exchange rate might not have played a role in monetary policy, suggesting that the stabilization probably occurred as a result of increased economic integration and business cycle convergence.
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Bibliographic InfoPaper provided by University Library of Munich, Germany in its series MPRA Paper with number 26575.
Date of creation: 09 Nov 2010
Date of revision:
Interest Rate Rules; Inflation Targeting; Central Bank Preferences; Fear of Floating.;
Other versions of this item:
- Gaetano D’Adamo, 2011. "Estimating Central Bank preferences in a small open economy: Sweden 1995-2009," Working Papers 1111, Department of Applied Economics II, Universidad de Valencia.
- C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-11-20 (All new papers)
- NEP-CBA-2010-11-20 (Central Banking)
- NEP-MAC-2010-11-20 (Macroeconomics)
- NEP-MON-2010-11-20 (Monetary Economics)
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