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

Author

Listed:
  • Lindé, Jesper

    () (Research Department, Central Bank of Sweden)

  • Nessén, Marianne

    () (Monetary Policy Department, Central Bank of Sweden)

  • Söderström, Ulf

    () (Università Bocconi)

Abstract

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.

Suggested Citation

  • Lindé, Jesper & Nessén, Marianne & Söderström, Ulf, 2004. "Monetary Policy in an Estimated Open-Economy Model with Imperfect Pass-Through," Working Paper Series 167, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0167
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    References listed on IDEAS

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    More about this item

    Keywords

    structural open-economy model; new open-economy macroeconomics; estimation; calibration;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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