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Monetary Policy in an Estimated Open-Economy Model with Imperfect Pass-Through

  • Lindé, Jesper

    ()

    (Research Department, Central Bank of Sweden)

  • Nessén, Marianne

    ()

    (Monetary Policy Department, Central Bank of Sweden)

  • Söderström, Ulf

    ()

    (Università Bocconi)

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 UIP, we need a large and volatile premium on foreign exchange.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 167.

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Length: 59 pages
Date of creation: 01 Jun 2004
Date of revision:
Handle: RePEc:hhs:rbnkwp:0167
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Phone: 08 - 787 00 00
Fax: 08-21 05 31
Web page: http://www.riksbank.com/
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