Monetary Policy and Uncertainty in an Empirical Small Open Economy Model

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper explores optimal policy design in an estimated model of three small open economies: Australia, Canada and New Zealand. Within a class of generalized Taylor rules, we show that to stabilize a weighted objective of output, consumer price in ‡ation and nominal interest variation optimal policy does not respond to the nominal exchange. This is despite the presence of local currency pricing and due, in large part, to observed exchange rate disconnect in these economies. Optimal policies that account for the uncertainty of model estimates, as captured by the parameters' posterior distrbution, similarly exhibit a lack of exchange rate response. In contrast to Brainard (1967), the presence of parameter uncertainty can lead to more or less aggressive policy responses, depending on the model at hand. Terms of use: Documents in EconStor may

Driving forces of the Swiss output gap

“…As in Lubik and Schorfheide (2007) and Justiniano and Preston (2010b), it can be concluded that including a reaction to changes in the nominal exchange rate in the Taylor rule is favored by the data. Most importantly, the models that are superior with respect to the log marginal likelihood all include the natural output gap in the Taylor rule.…”

“…e.g. Bäurle and Menz (2008) or Justiniano and Preston (2010b)). Finally, technology and the interest rate are highly persistent processes.…”

Measuring the natural output level by DSGE models: An empirical investigation for Switzerland

“…In its simple form, openness only influences the slope coefficients but plays otherwise no independent role. More elaborate models with a more prominent role for openness have been discussed, among others, by Monacelli (2005), Justiniano and Preston (2009) or Beltran and Draper (2008).…”

“…5 See also Lubik and Schorfheide (2007) and Bäurle and Menz (2008). 6 A rationale of these features based on microeconomic arguments can be found, for example, in Justiniano and Preston (2009). multivariate extension of the Hodrick-Prescott filter which allows to incorporate structural information like a backward looking Phillips curve and Okun's Law. 4 However, this procedure remains ad hoc and does not use a consistent and fully articulated model of the Swiss economy.…”

“…9 See Del Negro and Schorfheide (2008) and Schorfheide (2008) for details. 10 This strategy was also followed in DelNegro and Schorfheide (2008), Lubik and Schorfheide (2007), and Justiniano and Preston (2009). In the NKPC the parameters are functions of the underlying preference and technology parameters:…”