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Monetary Policy Evaluation using a Rational Expectations Model: the UK case

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  • Vasilev, Aleksandar

Abstract

This study follows Rotemberg and Woodford (1998) and estimates a three-equation model of output, interest rate and inflation, in order to evaluate alternative rules by which the UK monetary authority may decide on setting the main interest rate. As in the original paper, the model setup is a rational-expectations setup, augmented with nominal price-setting frictions a la Calvo (1983). The model-generated impulse responses match quite well the estimated responses to a monetary shock. In addition, when additional technology and taste shocks are added, the theoretical model can account for the fluctuations in the UK data as well as an unrestricted VAR(1) does.

Suggested Citation

  • Vasilev, Aleksandar, 2016. "Monetary Policy Evaluation using a Rational Expectations Model: the UK case," EconStor Research Reports 126141, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esrepo:126141
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    References listed on IDEAS

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    1. Julio J. Rotemberg & Michael Woodford, 1998. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy: Expanded Version," NBER Technical Working Papers 0233, National Bureau of Economic Research, Inc.
    2. Dixit, Avinash K & Stiglitz, Joseph E, 1977. "Monopolistic Competition and Optimum Product Diversity," American Economic Review, American Economic Association, vol. 67(3), pages 297-308, June.
    3. Alan S. Blinder, 1994. "On Sticky Prices: Academic Theories Meet the Real World," NBER Chapters, in: Monetary Policy, pages 117-154, National Bureau of Economic Research, Inc.
    4. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    5. Lucas, Robert Jr, 1976. "Econometric policy evaluation: A critique," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 1(1), pages 19-46, January.
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    JEL classification:

    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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