Showing posts from January, 2012

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

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_DNGS15 Policy 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_

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

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_ACELswt Policy rules: Smets & Wouters (2007), Christiano et al. (2005) Shocks:   Monetary Policy Shock Variables: 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 a

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

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_GNSS10 Policy Rules: Gerdesmeier & Roffia (2004) Shocks: Monetary Policy Shock Variables: 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