Estimating the Interest Rate Rule with Open Market Operations or Lump-Sum Transfers of Money
AbstractIt is common in DSGE models that aim to explain the impact of monetary policy on economic variables to identify prices by assuming lump-sum transfers of money. The consequence of this is that the interest rule in these models must be of the Taylor-rule type. In this paper we explore the consequences of using other, equally justifiable, monetary policy rules. In particular we show that the estimation of the interest rate rule crucially depends on whether monetary policy in a dynamic stochastic general equilibrium (DSGE) model is assumed to be implemented through open market operations or lump-sum transfers of money. To this end we estimate a segmented markets model where households and firms are subject to cash-in-advance constraints. In the model, Ricardian equivalence holds, so there is a one-to-one correspondence between equilibria where monetary policy is conducted in either way. However, while the equilibrium with open market operations is determinate for a large class of interest rate rules, the equilibrium with lump-sum transfers of money is determinate only if the interest rate rule is of the Taylor type, i.e. the coefficient of inflation is higher than one. As a result, the model estimation yields very different results in terms of likelihood, coefficients of the interest rate rule, and impulse responses to monetary policy shocks
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Bibliographic InfoPaper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 219.
Date of creation: 11 Nov 2005
Date of revision:
segmented markets; Bayesian model estimation and comparison; Monetary Policy Shocks;
Find related papers by JEL classification:
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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