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A Study of a New-Keynesian DSGE Macro Model: Estimates, Shocks, and Optimal Monetary Policy

Hjort, Erik LU (2019) NEKN01 20191
Department of Economics
Abstract
This paper estimates and simulates a New-Keynesian small-scale DSGE macro model. The model consists of the hybrid forms of the Phillips curve and the IS curve, and is closed with a Taylor-type feedback rule allowing partial adjustment of the monetary policy instrument. We estimate the three-equation system simultaneously on Swedish data 1995:Q1 to 2014:Q4 with the FIML estimator. The empirical parameter values are then used in simulations of the model to study the impact of shocks and optimize the policy rule by using an objective function. Our estimates indicate that both inflation and output possess a significant forward-looking behavior, and that the policy instrument is adjusted in a gradual manner. A sensitivity analysis of the... (More)
This paper estimates and simulates a New-Keynesian small-scale DSGE macro model. The model consists of the hybrid forms of the Phillips curve and the IS curve, and is closed with a Taylor-type feedback rule allowing partial adjustment of the monetary policy instrument. We estimate the three-equation system simultaneously on Swedish data 1995:Q1 to 2014:Q4 with the FIML estimator. The empirical parameter values are then used in simulations of the model to study the impact of shocks and optimize the policy rule by using an objective function. Our estimates indicate that both inflation and output possess a significant forward-looking behavior, and that the policy instrument is adjusted in a gradual manner. A sensitivity analysis of the magnitude of interest rate smoothing suggests a trade-off that the Central Bank faces when exogenous disturbances move the economy. In attempting to gauge preferences of monetary policy, we show that an optimized policy rule that roughly returns the historical rule is characterized by that the monetary authority in descending order stabilizes the volatility of the interest rate, the output gap and inflation from a target level. (Less)
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author
Hjort, Erik LU
supervisor
organization
course
NEKN01 20191
year
type
H1 - Master's Degree (One Year)
subject
keywords
New-Keynesian Economics, Rational Expectations, Monetary Policy, Aggregate Shocks, Small-scale DSGE Model
language
English
id
8993733
date added to LUP
2019-10-03 14:25:06
date last changed
2019-10-03 14:25:06
@misc{8993733,
  abstract     = {This paper estimates and simulates a New-Keynesian small-scale DSGE macro model. The model consists of the hybrid forms of the Phillips curve and the IS curve, and is closed with a Taylor-type feedback rule allowing partial adjustment of the monetary policy instrument. We estimate the three-equation system simultaneously on Swedish data 1995:Q1 to 2014:Q4 with the FIML estimator. The empirical parameter values are then used in simulations of the model to study the impact of shocks and optimize the policy rule by using an objective function. Our estimates indicate that both inflation and output possess a significant forward-looking behavior, and that the policy instrument is adjusted in a gradual manner. A sensitivity analysis of the magnitude of interest rate smoothing suggests a trade-off that the Central Bank faces when exogenous disturbances move the economy. In attempting to gauge preferences of monetary policy, we show that an optimized policy rule that roughly returns the historical rule is characterized by that the monetary authority in descending order stabilizes the volatility of the interest rate, the output gap and inflation from a target level.},
  author       = {Hjort, Erik},
  keyword      = {New-Keynesian Economics,Rational Expectations,Monetary Policy,Aggregate Shocks,Small-scale DSGE Model},
  language     = {eng},
  note         = {Student Paper},
  title        = {A Study of a New-Keynesian DSGE Macro Model: Estimates, Shocks, and Optimal Monetary Policy},
  year         = {2019},
}