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Measuring the Stance of Monetary Policy in a Closed Economy: A Dynamic Stochastic General Equilibrium Approach

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  • Vitek, Francis

Abstract

This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 801.

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Date of creation: 11 Jun 2006
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Handle: RePEc:pra:mprapa:801

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Keywords: Stance of monetary policy; Dynamic stochastic general equilibrium model; Monetary transmission mechanism; Forecast performance evaluation;

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  1. 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.
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  25. Vitek, Francis, 2006. "Monetary Policy Analysis in a Small Open Economy: A Dynamic Stochastic General Equilibrium Approach," MPRA Paper 800, University Library of Munich, Germany.
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  32. Francis Vitek, 2005. "An Unobserved Components Model of the Monetary Transmission Mechanism in a Closed Economy," Macroeconomics 0512018, EconWPA, revised 04 Feb 2006.
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