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Taylor Rules in an Estimated Model of a Small Open Economy

Author

Listed:
  • Nooman Rebei
  • Steven Ambler
  • Ali Dib

Abstract

We develop a model of a small open economy with three types of nominal rigidities (domestic goods prices, imported goods prices and wages) and eight different structural shocks. We estimate the model's structural parameters using a maximum likelihood procedure and use it to compute welfare-maximizing Taylor rules for setting domestic short-term interest rates. For these computations, we use a second-order approximation around the model's deterministic steady state, which allows the Taylor rule coefficients to affect the means of consumption, leisure and real balances as well as their variances. Welfare gains from moving to the optimal Taylor rule are substantial, but require a very precise knowledge of the values of the model's structural parameters

Suggested Citation

  • Nooman Rebei & Steven Ambler & Ali Dib, 2004. "Taylor Rules in an Estimated Model of a Small Open Economy," 2004 Meeting Papers 378, Society for Economic Dynamics.
  • Handle: RePEc:red:sed004:378
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    Citations

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    Cited by:

    1. PLASMANS, Joseph & FORNERO, Jorge & MICHALAK, Tomasz, 2006. "A microfounded sectoral model for open economies," Working Papers 2007013, University of Antwerp, Faculty of Applied Economics.
    2. repec:bla:reviec:v:25:y:2017:i:5:p:1046-1077 is not listed on IDEAS
    3. Charles Olivier Mao Takongmo, 2017. "Government-spending multipliers and the zero lower bound in an open economy," Review of International Economics, Wiley Blackwell, vol. 25(5), pages 1046-1077, November.
    4. Marcela Meirelles Aurelio, 2005. "Do we really know how inflation targeters set interest rates?," Research Working Paper RWP 05-02, Federal Reserve Bank of Kansas City.
    5. Alexander Rathke & Tobias Straumann & Ulrich Woitek, 2011. "Overvalued: Swedish Monetary Policy in the 1930s," CESifo Working Paper Series 3692, CESifo Group Munich.
    6. Gregory Erin Givens, 2006. "Revisiting the Delegation Problem in a Sticky Price and Wage Economy," Working Papers 200601, Middle Tennessee State University, Department of Economics and Finance.
    7. Riccardo Cristadoro & Andrea Gerali & Stefano Neri & Massimiliano Pisani, 2006. "Nominal Rigidities in an Estimated Two Country," Computing in Economics and Finance 2006 162, Society for Computational Economics.
    8. Thomas Lubik & Frank Schorfheide, 2005. "A Bayesian Look at New Open Economy Macroeconomics," Economics Working Paper Archive 521, The Johns Hopkins University,Department of Economics.

    More about this item

    Keywords

    Economic models; Open economy; Optimal monetary policy;

    JEL classification:

    • F2 - International Economics - - International Factor Movements and International Business
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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