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Optimal Monetary Policy in an Operational Medium-Sized DSGE Model

Author

Listed:
  • Adolfson, Malin

    (Monetary Policy Department, Central Bank of Sweden)

  • Laseén, Stefan

    (Monetary Policy Department, Central Bank of Sweden)

  • Lindé, Jesper

    (Monetary Policy Department, Central Bank of Sweden, Sveriges Riksbank, SE-103 37 Stockholm, Sweden and CEPR)

  • Svensson, Lars E.O.

    (Central Bank of Sweden, Sveriges Riksbank, SE-103 37 Stockholm, Sweden, Princeton University, CEPR and NBER)

Abstract

We show how to construct optimal policy projections in Ramses, the Riksbank’s openeconomy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function.

Suggested Citation

  • Adolfson, Malin & Laseén, Stefan & Lindé, Jesper & Svensson, Lars E.O., 2008. "Optimal Monetary Policy in an Operational Medium-Sized DSGE Model," Working Paper Series 225, Sveriges Riksbank (Central Bank of Sweden).
  • Handle: RePEc:hhs:rbnkwp:0225
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Optimal monetary policy; instrument rules; optimal policy projections; openeconomy DSGE models;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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