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Towards a compact, empirically-verified rational expectations model for monetary policy analysis

  • Fuhrer, Jeffrey C.

This paper extends the sticky-price models of Fuhrer and Moore (1995a,b) to include explicit, optimization-based consumption and investment decisions. The goal is to use the resulting model for monetary policy analysis; consequently, strong emphasis is placed on empirical validation of the model. I use a canonical formulation of the consumer's problem from Campbell and Mankiw (1989), and a time-to-build investment model with costs of adjustment. The restrictions imposed by these models, in conjunction with those imposed on prices and output by the Fuhrer-Moore contracting specification, imply dynamic behavior that is grossly inconsistent with the data.

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Article provided by Elsevier in its journal Carnegie-Rochester Conference Series on Public Policy.

Volume (Year): 47 (1997)
Issue (Month): 1 (December)
Pages: 197-230

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Handle: RePEc:eee:crcspp:v:47:y:1997:i::p:197-230
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  1. repec:nbr:nberre:0126 is not listed on IDEAS
  2. Miles S. Kimball, 1995. "The Quantitative Analytics of the Basic Neomonetarist Model," NBER Working Papers 5046, National Bureau of Economic Research, Inc.
  3. Brayton, Flint & Mauskopf, Eileen, 1985. "The federal reserve board MPS quarterly econometric model of the US economy," Economic Modelling, Elsevier, vol. 2(3), pages 170-292, July.
  4. Timothy Cogley & James M. Nason, 1993. "Output dynamics in real business cycle models," Working Papers in Applied Economic Theory 93-10, Federal Reserve Bank of San Francisco.
  5. Robert G. King & Alexander L. Wolman, 1996. "Inflation Targeting in a St. Louis Model of the 21st Century," NBER Working Papers 5507, National Bureau of Economic Research, Inc.
  6. Taylor, John B, 1980. "Aggregate Dynamics and Staggered Contracts," Journal of Political Economy, University of Chicago Press, vol. 88(1), pages 1-23, February.
  7. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
  8. Jeff Fuhrer & George Moore, 1995. "Inflation Persistence," The Quarterly Journal of Economics, Oxford University Press, vol. 110(1), pages 127-159.
  9. Oliner, Stephen & Rudebusch, Glenn & Sichel, Daniel, 1995. "New and Old Models of Business Investment: A Comparison of Forecasting Performance," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 806-26, August.
  10. King, Robert G. & Plosser, Charles I. & Rebelo, Sergio T., 1988. "Production, growth and business cycles : I. The basic neoclassical model," Journal of Monetary Economics, Elsevier, vol. 21(2-3), pages 195-232.
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