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

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_BGG99
  • Policy Rules: Smets and Wouters (2007)
  • Shocks: Monetary Policy Shock
  • Variables: 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 strong contemporaneous effect on GDP growth that feeds back to the interest rate via the contemporaneous response to GDP growth in the SW rule.

Reference: Afanasyeva E., Kuete M., Wieland V. & Yoo J. (2016)
Edited by Dück A.