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Could a central bank rely on the emerging 2nd generation NK models before the 2008 financial crisis?

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Why is it interesting?
The comparison shows that central banks have to deal with model uncertainty and that different models imply very different responses in key economic variables. Many central banks included second-generation New Keynesian models in their suite of models prior to the Great Recession, mainly due to the improved empirical fit of these models relative to the early small-scale models.

What to do on the MMB?
Models: NK_RW97, NK_IR04, US_ACELm, US_SW07Policy Rules: Gerdesmeier & Roffia (2004)Shocks: Monetary Policy ShockVariables: Inflation, Interest, Output
What is interesting?
The impulse responses peak on impact, returning only slowly to their non-stochastic steady state values afterwards. This is at odds with empirical VAR evidence, which suggests that both output and inflation exhibit a hump-shaped response to a monetary policy shock. Medium-size DSGE models of the second generation induce such hump-shaped impulse responses by adding capital in the production funct…

Does the more accommodative monetary policy lead to stronger fiscal policy effects?

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Why is it interesting?
This comparison highlights the importance of monetary policy accommodation for fiscal policy effects. It compares the impact of government spending by looking at different central bank reaction functions - model-specific estimated rule from Cogan et al. (2010) and the much more accommodative user-specified rule (as in Bernanke et al. (1999)) that responds only to lagged values of inflation and the interest rate and does not react to GDP.

What to do on the MMB?
Models: US_CCTW10Policy Rules: User specified rule (set 0.9 for interest_t-1 and 0.11 for infation_t-1), Model specific ruleShocks: Fiscal Policy ShockVariables: Inflation, Interest, Output
What is interesting? The increase in government purchases induces much stronger effects on aggregate GDP under the user-specified rule. Even in the absence of rule-of-thumb consumers, the GDP upshot exceeds unity in the first 4 quarters. The much more accommodative monetary policy regime allows for a Keynesian multiplier e…

Does the population share of rule-of-thumb consumers matter for the size of the fiscal multiplier?

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Why is it interesting?
This comparison evaluates the sensitivity of fiscal policy effects to the parameters governing household consumption choices. It compares the effects of government spending depending on the share of Keynesian-style rule-of-thumb households (w) – those that simply consume all current disposable income. Three cases are considered – share of 0 percent (all consumers are forward-looking and base their decision on expected life-time income), 26.5 percent (estimated value within the model) and 50 percent (an upper limit of estimates found in the literature on the U.S. economy).

What to do on the MMB?
Go to "Menu" > "Edit Rules/Models" and click the plus icon to add two additional models (in this example, US_CCTW100 and US_CCTW100265). Then copy the json and the mod file from US_CCTW10 and paste them in the two new models. Change model names in the json and mod files of the two new models. Set "omega" to 0 and 0.265 in the mod file of US…

Does a different implementation of financial frictions influence monetary policy decisions?

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Why is it interesting?
The comparison shows the effect of an unanticipated increase in the nominal interest rate of one percentage point for the commonly defined macroeconomic aggregates between different financial frictions.

What to do on the MMB?
Models: US_CD08, US_CMR14, US_DG08, US_SW07, NK_BGG99Policy Rules: Smets and Wouters (2007)Shocks: Monetary Policy ShockVariables: Inflation, Interest, Output, Output gap, Consumption, Investment
What is interesting?
The magnitude, timing and dynamic pattern of responses differ substantially across models. It is particularly striking that the smaller New Keynesian models NK_BGG99 and US_CD08 display much stronger responses of output and inflation and a much smaller response of the nominal interest rate than the medium-size DSGE models US_SW07, US_DG08 and US_CMR14. This diversity of responses to a monetary policy shock stands in contrast to the findings of Taylor and Wieland (2012). The reason is that in these two models monetary policy has a …

Which of the four is the most effective policy rule in a Smets-Wouters world (with financial frictions)?

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Why is it interesting?
A standard recommendation is to avoid surprises in monetary policy since they only generate additional output and inflation volatility. Instead, optimal and robust monetary policy design focuses on the proper choice of the variables and the magnitude of the response coefficients in the policy rule to stabilize output and inflation in the event of shocks emanating from other sectors of the economy. In this comparison we assess how different monetary policy rules perform in two widely used estimated models describing the US economy, the US_SW07 and the US_DNGS15 models, when hit by some other than a monetary or demand shock.

What to do on the MMB?
This is a one model against multiple rules exercise. Please tick only one model at a time for comparison.
Models: US_SW07, US_DNGS15Policy rules: Christiano et al. (2005) rule, Orphanides and Wieland (2013), Smets and Wouters (2007), Taylor (1993)Shocks:Technology shock, Risk premium shock (for US_SW07), psi_b (for US_DNGS…

What is the effect of a monetary policy shock if models differ in structure, estimation and data vintage?

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Why is it interesting?
This exercise aims to compare the second generation DSGE models (US_SW07, US_ACELm, US_ACELswt) and the model in G7_TAY93, as these models differ in terms of economic structure and parameter estimates, which are based on U.S. data.

What to do on the MMB?
Models: G7_TAY93, US_SW07, US_ACELm, US_ACELswtPolicy rules: Smets & Wouters (2007), Christiano et al. (2005)Shocks:Monetary Policy ShockVariables: Inflation, Interest rate, Output, Output Gap
What is interesting?
Surprisingly, the effect of the policy shock on real output and inflation given a common policy rule is very similar in the four models. The quantitative implications for real output in G7_TAY93 and US_SW07 are also almost identical. The outcome under US_ACELm initially differs slightly from the other two models. In the period of the shock we observe a tiny increase in output, while inflation does not react at all. From the second period onwards output declines to the same extent as in the other two m…

Is the macroeconomy too complex and uncertain to be represented by a single model?

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Why is it interesting?
Recognizing that the macroeconomy is too complex and uncertain to be represented by a single model, this comparison of 11 models, with a focus on the Euro Area, confirms that an optimized policy rule specific to a model would induce greater macroeconomic fluctuations. A generalized policy rule derived by averaging over the 11 models is more robust.

What to do on the MMB?
Models: EA_AWM05; G7_TAY93, EA_CW05fm, EA_CW05ta, G3_CW03; EA_SW03, EACZ_GEM03, EA_SR07, EA_QUEST3; EA_CKL09, EA_GNSS10Policy Rules: Gerdesmeier & Roffia (2004)Shocks: Monetary Policy ShockVariables: Inflation, Output
What is interesting?
The 11 models range from a traditional Keynesian model (EA_AWM05), the first wave of New Keynesian models (G7_TAY93, EA_CW05fm, EA_CW05ta, G3_CW03), modern NK models (EA_SW03, EACZ_GEM03, EA_SR07, EA_QUEST3) to NK models with frictions (EA_CKL09, EA_GNSS10). Since a generalized policy rule is introduced to all the 11 models, different impulse responses in thes…

What if our perception on the structure of the economy is seriously biased?

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Why is it interesting?
What if our perception on the structure of the economy is seriously biased? This question motivates the comparison of four models adopted by the ECB against one policy rule, to investigate if their impulse responses would be divergent.

What to do on the MMB?
Models: EA_AWM05, EA_CW05fm, EA_CW05ta, EA_SW03Policy Rules: Gerdesmeier & Roffia (2004)Shocks: Monetary Policy ShockVariables: Inflation, Output gap
What is interesting?
EA_AWM05 shows the highest degree of persistence in inflation and output gap while EA_SW03 the lowest; EA_CW05fm and EA_CW05ta are in between. (CH)


Reference: K├╝ster K., & Wieland V. (2005)
Edited by Huang C.C.