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Estimation of Monetary Policy Preferences in a Forward-Looking Model: A Bayesian Approach

  • Pelin lbas

    (Research Department, Norges Bank)

Registered author(s):

    In this paper we adopt a Bayesian approach toward the estimation of monetary policy preference parameters in a general equilibrium framework for the euro area. We assume that monetary policy authorities optimize an intertemporal quadratic loss function under commitment and study two alternative specifications of the loss function. The first specification includes inflation, output gap, and the interest rate differential as targets. The second loss function includes an additional wage-inflation target. The weights assigned to target variables - i.e., monetary policy preferences - are estimated jointly with the structural model parameters. The results imply that inflation variability remains the main concern of optimal monetary policy. Interest rate smoothing and the output gap appear to be, to a lesser extent, important target variables as well. Due to the time-inconsistency problem under commitment, we propose to initialize the estimates by a presample period of forty quarters. This allows us to approach, empirically, the timeless-perspective framework.

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    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 6 (2010)
    Issue (Month): 3 (September)
    Pages: 169-209

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    Handle: RePEc:ijc:ijcjou:y:2010:q:3:a:6
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    1. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Inflation Targeting Rules," NBER Working Papers 9939, National Bureau of Economic Research, Inc.
    2. Del Negro, Marco & Schorfheide, Frank, 2008. "Forming priors for DSGE models (and how it affects the assessment of nominal rigidities)," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1191-1208, October.
    3. Marc P. Giannoni & Michael Woodford, 2003. "Optimal Interest-Rate Rules: II. Applications," NBER Working Papers 9420, National Bureau of Economic Research, Inc.
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