Constructing and estimating a realistic optimizing model of monetary policy

Research output: Contribution to journalArticle

107 Citations (Scopus)

Abstract

A dynamic stochastic general-equilibrium (DSGE) model with real and nominal, both price and wage, rigidities succeeds in capturing some key nominal features of U.S. business cycles. Additive technology shocks, as well as multiplicative shocks, are introduced and shown to be crucial. Monetary policy is specified as an interest rate targeting rule following developments in the structural vector autoregression (VAR) literature. The interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy. The model is estimated by maximum likelihood on U.S. data, and its fit is comparable to that of an unrestricted first-order VAR. Besides producing reasonable impulse responses and second moments, this model replicates a feature of U.S. business cycles, never captured by previous research with DSGE models, that an increase in interest rates predicts a decrease in output two to six quarters in the future.

Original languageEnglish
Pages (from-to)329-359
Number of pages31
JournalJournal of Monetary Economics
Volume45
Issue number2
Publication statusPublished - 2000 Apr 1
Externally publishedYes

Fingerprint

Optimizing model
Monetary policy
Business cycles
Interest rates
Dynamic stochastic general equilibrium model
Wage rigidity
Targeting rules
Liquidity effect
Real rigidities
Structural vector autoregression
Price rigidity
Impulse response
Vector autoregression
Technology shocks
Nominal rigidities
Interaction
Maximum likelihood

Keywords

  • Additive technology shocks
  • C51
  • E32
  • E50
  • Monetary policy
  • Optimizing model

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Constructing and estimating a realistic optimizing model of monetary policy. / Kim, Jinill.

In: Journal of Monetary Economics, Vol. 45, No. 2, 01.04.2000, p. 329-359.

Research output: Contribution to journalArticle

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