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A Keynesian Based Econometric Framework for Studying Monetary Policy Rules

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Abstract

In the framework of a Keynesian based monetary macromodel we study the implications of alternative monetary policy rules. Our monetary macromodel exhibits the following features: asset market clearing, disequilibrium in the product and labor markets, sluggish price and quantity adjustments, two Phillips curves for the wage and price dynamics and expectations formulation which represents a combination of adaptive and forward looking behavior. Two alternative monetary policy rules for controlling inflation are considered: the monetary authority (1) targeting monetary aggregates or (2) targeting the interest rate. For those two policy rules the model's dynamic features are explored given certain parameter constellations. Then the key parameters of the model variants are estimated through GMM and single equation estimations employing US time series data 1960.1-1995.1. Stochastic simulations are performed and contrasted with US macroeconomic data in terms of standard deviations of macro variables as well as their cross-correlation to output. The model can be viewed as an alternative to equilibrium macromodels in fitting macroeconomic data. With respect to out two monetary regimes it seems that in terms of volatility the model variant with the second policy rule gives a better fit whereas for cross-correlation with output the variant with the first policy rule performs better.

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  • Peter Flaschel & Gang Gong & Willi Semmler, 1998. "A Keynesian Based Econometric Framework for Studying Monetary Policy Rules," SCEPA working paper series. 1998-04, Schwartz Center for Economic Policy Analysis (SCEPA), The New School.
    • Handle: RePEc:epa:cepawp:1998-04
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    References listed on IDEAS

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    1. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-239, March.
    2. Bernanke, Ben S & Blinder, Alan S, 1992. "The Federal Funds Rate and the Channels of Monetary Transmission," American Economic Review, American Economic Association, vol. 82(4), pages 901-921, September.
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    5. Orphanides, Athanasios & Solow, Robert M., 1990. "Money, inflation and growth," Handbook of Monetary Economics, in: B. M. Friedman & F. H. Hahn (ed.), Handbook of Monetary Economics, edition 1, volume 1, chapter 6, pages 223-261, Elsevier.
    6. Ben S. Bernanke & Julio J. Rotemberg, 1997. "NBER Macroeconomics Annual 1997, Volume 12," NBER Books, National Bureau of Economic Research, Inc, number bern97-1.
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    8. Hallman, Jeffrey J & Porter, Richard D & Small, David H, 1991. "Is the Price Level Tied to the M2 Monetary Aggregate in the Long Run?," American Economic Review, American Economic Association, vol. 81(4), pages 841-858, September.
    9. repec:bla:scandj:v:95:y:1993:i:3:p:355-63 is not listed on IDEAS
    10. Semmler, Will & Gong, Gang, 1996. "Estimating parameters of real business cycle models," Journal of Economic Behavior & Organization, Elsevier, vol. 30(3), pages 301-325, September.
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    Cited by:

    1. Carl Chiarella & Peter Flaschel & Gangolf Groh & Carsten Köper & Willi Semmler, 1999. "Towards Applied Disequilibrium Growth Theory: VI Substitution, Money-Holdings, Wealth-Effects and Further Extensions," Working Paper Series 98, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    2. Flaschel, Peter & Gong, Gang & Semmler, Willi, 2001. "A Keynesian macroeconometric framework for the analysis of monetary policy rules," Journal of Economic Behavior & Organization, Elsevier, vol. 46(1), pages 101-136, September.
    3. Gong, Gang & Lin, Justin Yifu, 2008. "Deflationary expansion: An overshooting perspective to the recent business cycle in China," China Economic Review, Elsevier, vol. 19(1), pages 1-17, March.
    4. Gang Gong & Jian Gao, 2008. "Monetary policy under fixed exchange regime: A study on the future monetary policy in China," Psychometrika, Springer;The Psychometric Society, vol. 3(2), pages 169-208, June.
    5. Carl Chiarella & Peter Flaschel, 1999. "Towards Applied Disequilibrium Growth Theory: I The Starting Model," Working Paper Series 93, Finance Discipline Group, UTS Business School, University of Technology, Sydney.

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