Monetary Policy in Estimated Models of Small Open and Closed Economies

Abstract

This paper compares monetary policy effects in New-Keynesian models of small open and closed economies fit to Canada. A monetary policy rule allows the central bank to systematically manage the nominal interest rate in response to inflation, output, and money growth variations. The structural parameters of a small open-economy (SOE) and a closed-economy (CE) models are estimated using a maximum-likelihood procedure with a Kalman filter. Estimation results show that the SOE and CE models lead to qualitatively similar estimates for the Canadian economy. Also, the effects of monetary policy shocks, and of other domestic shocks, generated in the SOE model resemble to those generated in the CE model. In addition, the forecast-error decomposition shows that foreign shocks account for small fractions of the variability observed in Canadian macroeconomic variables.Keywords Monetary policy · Price stickiness · Small open and closed economies JEL Classification E31 · E52 · F2 · F3 I am grateful to an anonymous referee, Steve Ambler, Hafedh Bouakez, Brain Doyle, Kevin Moran, and Nooman Rebei for their useful comments and discussions. The views expressed in this paper are those of the author. No responsibility of them should be attributed to the Bank of Canada.A. Dib (B)

Monetary Policy and Uncertainty in an Empirical Small Open Economy Model

“…Our analysis also builds on the ever growing literature on estimating small open economy models using Bayesian methods -see Ambler, Dib, and Rebei (2004), Bergin (2003, 2004), Del Negro (2003, Dib (2003), Ghironi (2000), Justiniano andPreston (2004, 2006), Schorfheide (2003, 2005), Lubik and Teo (2005) and Rabanal and Tuesta (2005).…”

A North-South Trade Model of Offshoring and Unemployment

“…While there is a large literature on open economy dynamic general equilibrium models (see, e.g., Meenagh et al 2009, Dib 2011and Wickens 2014, relatively little is known about the quantitative effects of low-wage competition. Finally, the issues of how unions can credibly commit to wage restraint and the optimal degree of commitment deserve further investigation.…”

Disaggregating Real Exchange Rate Dynamics: A Structural Approach

“…Other Checks 15 The main results favoring the importance of the purely tradable component of the real exchange rate hold when (a) we remove the sector-speci…c technology shocks and instead use price-mark up shocks in each intermediate sector (b) N T the elasticity of substitution between non-tradables and tradables is set to 0.001 implying near Leontief complementarity between the two and (c) physical capital accumulation is removed from the model. 1 4 This experiment is necessary because the extremely potent in ‡uence of the UIP shock may mask the importance of other shocks in the model.…”

“…To the extent that the SOE model is estimated with Canada-US data, this paper is also related to the work of Preston (2006, 2010) and Dib (2003) who estimate more stylized SOE models on similar datasets. The former examines the in ‡uence of foreign shocks on the SOE while the latter compares macroeconomic dynamics under closed economy and open-economy assumptions.…”