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An Unobserved Components Model of the Monetary Transmission Mechanism in a Closed Economy

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Author Info
Francis Vitek (University of British Columbia)

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Abstract

This paper develops and estimates an unobserved components model for purposes of monetary policy analysis in a closed economy. Cyclical components are modeled as a multivariate linear rational expectations model of the monetary transmission mechanism, while trend components are modeled as unobserved components while ensuring the existence of a well defined balanced growth path. Full information maximum likelihood estimation of this unobserved components model, conditional on prior information concerning the values of trend components, provides a quantitative description of the monetary transmission mechanism in a closed economy, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts.

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Publisher Info
Paper provided by EconWPA in its series Macroeconomics with number 0512018.

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Length: 38 pages
Date of creation: 27 Dec 2005
Date of revision: 04 Feb 2006
Handle: RePEc:wpa:wuwpma:0512018

Note: Type of Document - pdf; pages: 38
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Web page: http://129.3.20.41

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Related research
Keywords: Monetary policy analysis Unobserved components model Indicators of inflationary pressure Monetary transmission mechanism Forecast performance evaluation

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Find related papers by JEL classification:
E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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  1. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May. [Downloadable!] (restricted)
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  2. Thomas Laubach & John C. Williams, 2001. "Measuring the natural rate of interest," Finance and Economics Discussion Series 2001-56, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  3. Watson, Mark W., 1989. "Recursive solution methods for dynamic linear rational expectations models," Journal of Econometrics, Elsevier, vol. 41(1), pages 65-89, May. [Downloadable!] (restricted)
  4. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Gordon, David B & Leeper, Eric M, 1994. "The Dynamic Impacts of Monetary Policy: An Exercise in Tentative Identification," Journal of Political Economy, University of Chicago Press, vol. 102(6), pages 1228-47, December. [Downloadable!] (restricted)
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  6. Christopher A. Sims & Tao A. Zha, 1998. "Does monetary policy generate recessions?," Working Paper 98-12, Federal Reserve Bank of Atlanta. [Downloadable!]
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  7. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Working Paper 0107, Federal Reserve Bank of Cleveland. [Downloadable!]
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  8. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Vitek, Francis, 2006. "Measuring the Stance of Monetary Policy in a Small Open Economy: A Dynamic Stochastic General Equilibrium Approach," MPRA Paper 802, University Library of Munich, Germany. [Downloadable!]
  2. 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. [Downloadable!]
  3. Vitek, Francis, 2006. "Measuring the Stance of Monetary Policy in a Closed Economy: A Dynamic Stochastic General Equilibrium Approach," MPRA Paper 801, University Library of Munich, Germany. [Downloadable!]
  4. Vitek, Francis, 2006. "Monetary Policy Analysis in a Closed Economy: A Dynamic Stochastic General Equilibrium Approach," MPRA Paper 797, University Library of Munich, Germany. [Downloadable!]
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