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Measuring the Stance of Monetary Policy in a Closed Economy: A Dynamic Stochastic General Equilibrium Approach

  • Vitek, Francis

This paper develops and estimates a dynamic stochastic general equilibrium model of a closed economy which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The model features short run nominal price and wage rigidities generated by monopolistic competition and staggered reoptimization in output and labour markets. The resultant inertia in inflation and persistence in output is enhanced with other features such as habit persistence in consumption and labour supply, adjustment costs in housing and capital investment, and variable capital utilization. Cyclical components are modeled by linearizing equilibrium conditions around a stationary deterministic steady state equilibrium which abstracts from long run balanced growth, while trend components are modeled as random walks while ensuring the existence of a well defined balanced growth path. Parameters and unobserved components are jointly estimated with a novel Bayesian full information maximum likelihood procedure, conditional on prior information concerning the values of parameters and trend components.

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File URL: http://mpra.ub.uni-muenchen.de/801/1/MPRA_paper_801.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 801.

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Date of creation: 11 Jun 2006
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Handle: RePEc:pra:mprapa:801
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  1. Newey, Whitney & West, Kenneth, 2014. "A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
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  12. Nelson, Charles R & Kang, Heejoon, 1979. "Spurious Periodicity in Inappropriately Detrended Time Series," The Warwick Economics Research Paper Series (TWERPS) 161, University of Warwick, Department of Economics.
  13. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1998. "Monetary Policy Shocks: What Have We Learned and to What End?," NBER Working Papers 6400, National Bureau of Economic Research, Inc.
  14. David Altig & Lawrence Christiano & Martin Eichenbaum & Jesper Linde, 2005. "Online Appendix to "Firm-Specific Capital, Nominal Rigidities and the Business Cycle"," Technical Appendices 09-191, Review of Economic Dynamics.
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  17. David B. Gordon & Eric M. Leeper, 1992. "The dynamic impacts of monetary policy: an exercise in tentative identification," Working Paper 92-13, Federal Reserve Bank of Atlanta.
  18. Vitek, Francis, 2006. "Monetary Policy Analysis in a Small Open Economy: A Dynamic Stochastic General Equilibrium Approach," MPRA Paper 800, University Library of Munich, Germany.
  19. Francisco J. Ruge-Murcia, 2004. "Methods to Estimate Dynamic Stochastic General Equilibrium Models," 2004 Meeting Papers 83, Society for Economic Dynamics.
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  21. Francis Vitek, 2005. "An Unobserved Components Model of the Monetary Transmission Mechanism in a Closed Economy," Macroeconomics 0512018, EconWPA, revised 04 Feb 2006.
  22. Sungbae An & Frank Schorfheide, 2006. "Bayesian analysis of DSGE models," Working Papers 06-5, Federal Reserve Bank of Philadelphia.
  23. Francis Vitek, 2005. "An Unobserved Components Model of the Monetary Transmission Mechanism in a Small Open Economy," Macroeconomics 0512019, EconWPA, revised 04 Feb 2006.
  24. Giammarioli, Nicola & Valla, Natacha, 2004. "The natural real interest rate and monetary policy: a review," Journal of Policy Modeling, Elsevier, vol. 26(5), pages 641-660, July.
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  31. Vitek, Francis, 2006. "Monetary Policy Analysis in a Closed Economy: A Dynamic Stochastic General Equilibrium Approach," MPRA Paper 797, University Library of Munich, Germany.
  32. Eric M. Leeper & Christopher A. Sims & Tao Zha, 1996. "What Does Monetary Policy Do?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(2), pages 1-78.
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