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Optimal Monetary Policy in an Operational Medium-Sized DSGE ModelMalin AdolfsonSveriges Riksbank Stefan LaseenSveriges Riksbank - Monetary Policy Department Jesper LindeFederal Reserve Board Lars E. O. SvenssonSveriges Riksbank; Stockholm University - Institute for International Economic Studies (IIES); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR) February 24, 2009 Riksbank Research Paper Series No. 56 Riksbank Working Paper Series No. 225 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.
Number of Pages in PDF File: 62 Keywords: Optimal monetary policy, instrument rules, optimal policy projections, openeconomy JEL Classification: E52, E58 working papers seriesDate posted: April 8, 2009Suggested CitationContact Information
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