Quantitative New Keynesian Macroeconomics and Monetary Policy Project Report

Essay 1 compares the dynamic behaviour of an estimated New Keynesian sticky-price model with one-period delayed effects of monetary policy shocks to the dynamics of a structural vector autoregression model. The model is estimated with Bayesian techniques on German pre-EMU data. The dynamics of the sticky-price model following either a demand shock or monetary policy shock are qualitatively and quantitatively comparable to those of the estimated structural VAR. When compared to the delayed-effects model, an alternative model with contemporaneous effects of monetary policy is rejected according to the posterior-odds ratio criterion.
Essay 2 addresses the transmission of exchange-rate variations in an estimated, small open-economy model. In contrast to the standard New Open Economy Macroeconomics framework, imported goods are treated here as material inputs to production. The resulting model structure is transparent and tractable while also able to account for imperfect pass through of exchange-rate shocks. The model is estimated with Bayesian methods on German data and the key finding is that a substantial depreciation of the nominal exchange rate leads to only modest effects on CPI inflation. An extended version of the model reveals that relatively small weight is placed on foreign consumption…

Contents

Introduction
1 Assessing Predetermined Expectations in the Standard Sticky Price Model:
A Bayesian Approach
1.1 Introduction
1.2 The Sticky Price Model
1.2.1 Households
1.2.2 Firms
1.2.3 Central Bank
1.2.4 Solution of the Model
1.3 Estimation
1.3.1 Data
1.3.2 Estimation Methodology
1.3.3 Specification of Priors
1.4 Results
1.4.1 Parameter Estimates
1.4.2 Empirical Performance of the Model
1.4.3 Impulse-Response Analysis
1.4.4 Comparison to VAR
1.4.5 Comparison to a Model with Contemporaneous Effects
1.4.6 Estimation Diagnostic
1.5 Summary and Conclusions
Appendices
A Model with Delays
A.1 Matrix Representation
B Bayesian Concepts
B.1 Metropolis-Hastings Algorithm
B.2 Marginal Likelihood Computation
C Model with Contemporaneous Effects
C.1 Estimation Results
C.2 Prior and Posterior Kernels
C.3 Impulse Responses
2 Transmission of Exchange-Rate Variations in an Estimated, Small-Open Economy Model
2.1 An Alternative Open-Economy Model
2.1.1 Aggregate Supply
2.1.2 Aggregate Demand and Wage Setting
2.1.3 Monetary Policy
2.1.4 Foreign Economy
2.2 Including Foreign Consumption Goods
2.3 Solution and Estimation
2.3.1 Model Solutio
2.3.2 Methodology
2.4 Data and Prior Specification
2.4.1 Data
2.4.2 Prior Specification
2.5 Result
2.5.1 The Benchmark Model
2.5.2 Transmission of Shocks in the Benchmark Model
2.5.3 The Extended Model
2.5.4 Evaluation
2.6 Conclusions
Appendices
A Data and Sources
B Derivation of Model Dynamics in the Benchmark Model
B.1 Firms
B.2 Aggregate Demand
B.3 Net Foreign Assets
C The Extended Model
D Figures and Results
D.1 Benchmark Model
D.2 Exchange-Rate Pass Through and Price Stickiness
D.3 Prior- and Posterior Density – Extended Model
3 Can a Time-Varying Equilibrium Real Interest Rate Explain the Excess Sensitivity Puzzle?
3.1 Introduction
3.2 A Stylised Model
3.3 Estimating a Time-Varying Equilibrium Real Rate
3.3.1 Data
3.3.2 Empirical Specification
3.3.3 Results
3.4 The Puzzle Explained?
3.4.1 Impulse Responses of Nominal Interest Rates
3.4.2 Regression Evidence from Interest Rate Changes
3.4.3 Sensitivity Analysis
3.5 Conclusions
Appendices
A Derivation of the Equilibrium Real Rate
B State Space Representation
C Conditional Likelihoods
D Output Gap and Real Rate Gap
4 Interest-Rate Smoothing versus Serially Correlated Errors in Taylor Rules:Testing the Tests
4.1 Introduction
4.2 The Taylor Rule
4.2.1 Basic Specification and Empirical Evidence
4.2.2 Related Literature
4.3 Two Tests for Interest-Rate Smoothing
4.4 Model and Data Generating Process
4.5 Simulations and Results
4.5.1 Results
4.6 Discussion and Conclusion

Author: Welz, Peter

Source: Uppsala University Library

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Quantitative New Keynesian Macroeconomics and Monetary Policy Project Report