Working Paper: CEPR ID: DP6907
Authors: Malin Adolfson; Stefan Lasen; Jesper Lind; Lars E. O. Svensson
Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function.
Keywords: Instrument Rules; Open-Economy DSGE Models; Optimal Monetary Policy; Optimal Policy Projections
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Ramses model provides optimal policy projections (E17) | minimize a loss function under commitment (C78) |
| choice of output gap definitions (E23) | optimal policy projections (C54) |
| using conditional potential output (C67) | stabilize inflation more effectively (E63) |
| Riksbank's historical policy behavior (E52) | characterized by a simple instrument rule (C26) |
| model's parameters (C51) | structurally invariant to policy assumptions (C20) |
| initial values of Lagrange multipliers (C51) | influence optimal policy projections (C54) |
| choice of output gap in the loss function (E23) | plays a critical role in determining effectiveness of monetary policy (E52) |
| optimal policy projections (C54) | stabilize economic variables (E63) |