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An Unobserved Components Model of the Monetary Transmission Mechanism in a Small Open Economy

  • Francis Vitek

    (University of British Columbia)

This paper develops and estimates an unobserved components model for purposes of monetary policy analysis and inflation targeting in a small open economy. Cyclical components are modeled as a multivariate linear rational expectations model of the monetary transmission mechanism, while trend components are modeled as unobserved components while ensuring the existence of a well defined balanced growth path. Full information maximum likelihood estimation of this unobserved components model, conditional on prior information concerning the values of trend components, provides a quantitative description of the monetary transmission mechanism in a small open economy, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts.

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Paper provided by EconWPA in its series Macroeconomics with number 0512019.

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Length: 44 pages
Date of creation: 27 Dec 2005
Date of revision: 04 Feb 2006
Handle: RePEc:wpa:wuwpma:0512019
Note: Type of Document - pdf; pages: 44
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  14. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148 Elsevier.
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