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Monetary Regime Change and Business Cycles

  • Cúrdia, Vasco

    (Macroeconomic and Monetary Studies Function)

  • Finocchiaro, Daria

    ()

    (Research Department, Central Bank of Sweden)

This paper analyzes to what extent changes in monetary policy regimes influence the business cycle in a small open economy and investigates the impact of policy breaks on the estimation procedure. We estimate a DSGE model on Swedish data, explicitly taking into account the monetary regime change in 1993, from exchange rate targeting to inflation targeting. The results suggest that monetary policy reacted strongly to exchange rate movements in the former, and mostly to inflation in the latter. The external sector plays an important role in the economy and the international transmission mechanism is significantly affected by the choice of exchange rate regime. A counterfactual experiment that applies the inflation targeting policy rule on the disturbances from the exchange rate targeting period suggests that such a policy would have led to higher output and employment, but also to a depreciated currency, higher inflation and a more volatile economy. We also show evidence that ignoring the break in the estimation leads to spurious results for both the parameters associated with monetary policy as well as those that are policy-independent.

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Paper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 241.

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Length: 62 pages
Date of creation: 01 Apr 2010
Date of revision:
Handle: RePEc:hhs:rbnkwp:0241
Contact details of provider: Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
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  1. Alejandro Justiniano & Bruce Preston, 2008. "Can Structural Small Open Economy Models Account for the Influence of Foreign Disturbances?," NBER Working Papers 14547, National Bureau of Economic Research, Inc.
  2. Alejandro Justiniano & Giorgio E. Primiceri, 2008. "The Time-Varying Volatility of Macroeconomic Fluctuations," American Economic Review, American Economic Association, vol. 98(3), pages 604-41, June.
  3. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2008. "Evaluating an estimated new Keynesian small open economy model," Journal of Economic Dynamics and Control, Elsevier, vol. 32(8), pages 2690-2721, August.
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  7. Robert Kollmann, 2001. "The exchange rate in a dynamic-optimizing business cycle model with nominal rigidities: a quantitative investigation," ULB Institutional Repository 2013/7630, ULB -- Universite Libre de Bruxelles.
  8. Philip Lane & Gian Maria Milesi-Ferretti, 2001. "Long-Term Capital Movements," Trinity Economics Papers 200112, Trinity College Dublin, Department of Economics.
    • Philip R. Lane & Gian Maria Milesi-Ferretti, 2002. "Long-Term Capital Movements," NBER Chapters, in: NBER Macroeconomics Annual 2001, Volume 16, pages 73-136 National Bureau of Economic Research, Inc.
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  10. An, Sungbae & Schorfheide, Frank, 2005. "Bayesian Analysis of DSGE Models," CEPR Discussion Papers 5207, C.E.P.R. Discussion Papers.
  11. Alejandro Justiniano & Bruce Preston, 2009. "Monetary policy and uncertainty in an empirical small open economy model," Working Paper Series WP-09-21, Federal Reserve Bank of Chicago.
  12. Adolfson, Malin & Laseen, Stefan & Linde, Jesper & Villani, Mattias, 2007. "Bayesian estimation of an open economy DSGE model with incomplete pass-through," Journal of International Economics, Elsevier, vol. 72(2), pages 481-511, July.
  13. Jesper Lindé & Marianne Nessén & Ulf Söderström, 2004. "Monetary Policy in an Estimated Open-Economy Model with Imperfect Pass-Through," Working Papers 263, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
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  17. Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.).
  18. Belaygorod, Anatoliy & Dueker, Michael, 2009. "Indeterminacy, change points and the price puzzle in an estimated DSGE model," Journal of Economic Dynamics and Control, Elsevier, vol. 33(3), pages 624-648, March.
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  21. Eo, Yunjong, 2008. "Bayesian Analysis of DSGE Models with Regime Switching," MPRA Paper 13910, University Library of Munich, Germany, revised 11 Feb 2009.
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  30. repec:dgr:kubcen:199667 is not listed on IDEAS
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