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Monetary policy in an estimated open-economy model with imperfect pass-through

  • Jesper Lindé

    (Monetary Policy Department, Sveriges Riksbank, Sweden)

  • Marianne Nessén

    (Monetary Policy Department, Sveriges Riksbank, Sweden)

  • Ulf Söderström

    (Department of Economics and IGIER, Università Bocconi, Italy)

We develop a structural model of a small open economy with gradual exchange rate pass-through and endogenous inertia in inflation and output. We then estimate the model by matching the implied impulse responses with those obtained from a VAR model estimated on Swedish data. Although our model is highly stylized it captures very well the responses of output, domestic and imported inflation, the interest rate, and the real exchange rate. However, in order to account for the observed persistence in the real exchange rate and the large deviations from uncovered interest parity (UIP), we need a large and volatile premium on foreign exchange. Copyright © 2008 John Wiley & Sons, Ltd.

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Article provided by John Wiley & Sons, Ltd. in its journal International Journal of Finance & Economics.

Volume (Year): 14 (2009)
Issue (Month): 4 ()
Pages: 301-333

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Handle: RePEc:ijf:ijfiec:v:14:y:2009:i:4:p:301-333
DOI: 10.1002/ijfe.377
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