Working Paper: CEPR ID: DP5467
Authors: Fabio Canova
Abstract: This paper investigates the relationship between monetary policy and the changes experienced by the US economy using a small scale New Keynesian model. The model is estimated with Bayesian techniques and the stability of policy parameter estimates and of the transmission of policy shocks examined. The model fits well the data and produces forecasts comparable or superior to those of alternative specifications. The parameters of the policy rule, the variance and the transmission of policy shocks have been remarkably stable. The parameters of the Phillips curve and of the Euler equations are varying.
Keywords: Bayesian methods; Great Inflation; Monetary policy; New Keynesian model
JEL Codes: C53; E47; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| monetary policy changes (E52) | economic outcomes (F61) |
| posterior distribution stability (D39) | reaction of interest rates to inflation (E43) |
| variance of policy shocks (C54) | magnitude of policy shocks (E65) |
| variations in posterior distributions of coefficients related to Phillips curve and Euler equation (C51) | economic dynamics (P42) |
| monetary policy's influence (E52) | understanding of economic changes (N14) |