A 2-Equation Model of the North Atlantic Economies, a Dynamic Panel Study
Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy to replace the conventional IS-LM-AS model. One of their new equations is a monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. They label their replacement model the IS-PC-MR. Central banks achieve the PC-MR solution by setting interest rates along an IS curve. Observing that governments have more tools than just the interest rate, we simplify their model to 2 equations. We develop a state space econometric specification as the solution of these equations, adding a random walk model of the unobserved potential growth. Applying this method to a panel of North Atlantic countries, we find it historically consistent with a few qualifications. For one, governments are more likely to target growth rates, than output gaps. And, inflation expectations are more likely backward looking, than rational, but a two-step estimation based on a forward-looking sticky-price model dramatically improves the empirical fit. Significant interdependence can be seen in the between-country covariance of inflation and growth shocks.
|Date of creation:||2010|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: (801) 581-7481
Fax: (801) 585-5649
Web page: http://economics.utah.edu
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- RUGE-MURCIA, Francisco .J., 2001.
"Inflation Targeting Under Asymmetric Preferences,"
Cahiers de recherche
2001-04, Universite de Montreal, Departement de sciences economiques.
- Francisco J. Ruge-Murcia, 2001. "Inflation Targeting Under Asymmetric Preferences," Banco de Espa�a Working Papers 0106, Banco de Espa�a.
- Francisco Javier Ruge-Murcia, 2001. "Inflation Targeting Under Asymmetric Preferences," IMF Working Papers 01/161, International Monetary Fund.
- Ruge-Murcia, F.J., 2001. "Inflation Targeting Under Asymmetric Preferences," Cahiers de recherche 2001-04, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
- Robert J. Barro & David B. Gordon, 1981.
"A Positive Theory of Monetary Policy in a Natural-Rate Model,"
NBER Working Papers
0807, National Bureau of Economic Research, Inc.
- Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
- Karl Whelan & Jeremy Rudd, 2003.
"Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?,"
Computing in Economics and Finance 2003
181, Society for Computational Economics.
- Jeremy Rudd & Karl Whelan, 2006. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics?," American Economic Review, American Economic Association, vol. 96(1), pages 303-320, March.
- Jeremy Rudd & Karl Whelan, 2003. "Can rational expectations sticky-price models explain inflation dynamics?," Finance and Economics Discussion Series 2003-46, Board of Governors of the Federal Reserve System (U.S.).
- Rudd, Jeremy & Whelan, Karl, 2003. "Can Rational Expectations Sticky-Price Models Explain Inflation Dynamics," Research Technical Papers 5/RT/03, Central Bank of Ireland.
- Thomas Sargent & Noah Williams & Tao Zha, 2004.
"Shocks and government beliefs: the rise and fall of American inflation,"
2004-22, Federal Reserve Bank of Atlanta.
- Thomas Sargent & Noah Williams & Tao Zha, 2006. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," American Economic Review, American Economic Association, vol. 96(4), pages 1193-1224, September.
- Thomas Sargent & Noah Williams & Tao Zha, 2004. "Shocks and Government Beliefs: The Rise and Fall of American Inflation," NBER Working Papers 10764, National Bureau of Economic Research, Inc.
- Peter N. Ireland, 1998.
"Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?,"
Boston College Working Papers in Economics
415, Boston College Department of Economics.
- Ireland, Peter N., 1999. "Does the time-consistency problem explain the behavior of inflation in the United States?," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 279-291, October.
- Peter Ireland, 1998. "Matlab code for Does the Time-Consistency Problem Explain the Behavior of Inflation in the United States?," QM&RBC Codes 44, Quantitative Macroeconomics & Real Business Cycles.
- repec:ner:tilbur:urn:nbn:nl:ui:12-76576 is not listed on IDEAS
- Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
- Carlin Wendy & Soskice David, 2005.
"The 3-Equation New Keynesian Model --- A Graphical Exposition,"
The B.E. Journal of Macroeconomics,
De Gruyter, vol. 5(1), pages 1-38, December.
- Carlin, Wendy & Soskice, David, 2004. "The 3-Equation New Keynesian Model: A Graphical Exposition," CEPR Discussion Papers 4588, C.E.P.R. Discussion Papers.
- Harvey, A C, 1985. "Trends and Cycles in Macroeconomic Time Series," Journal of Business & Economic Statistics, American Statistical Association, vol. 3(3), pages 216-27, June.
When requesting a correction, please mention this item's handle: RePEc:uta:papers:2010_06. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.