Working Paper: NBER ID: w14092
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 our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incorporates large international spillover effects.
Keywords: monetary policy; DSGE model; output gap; Bayesian estimation
JEL Codes: E52; E58; F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| optimal monetary policy (E63) | inflation stabilization (E31) |
| optimal monetary policy (E63) | output gap stabilization (E63) |
| output gap measure choice (E23) | transmission of shocks (F42) |
| conditional output gap (E19) | inflation stabilization (E31) |
| trend output gap (E23) | inflation stabilization (E31) |
| simple instrument rule with policy shock (C54) | empirical fit of the model (C51) |
| shocks to total factor productivity (O49) | business cycle variations (E32) |
| monetary policy specification (E52) | model parameters stability (C62) |