Evaluating an Estimated New Keynesian Small Open Economy Model

59 Pages Posted: 18 Oct 2007

See all articles by Malin Adolfson

Malin Adolfson

Sveriges Riksbank

Jesper Lindé

Sveriges Riksbank - Research Division

Stefan Laseen

Sveriges Riksbank - Monetary Policy Department

Mattias Villani

Sveriges Riksbank - Research Division; Stockholm University - Department of Statistics

Multiple version iconThere are 2 versions of this paper

Date Written: February 8, 2007

Abstract

This paper estimates and tests a new Keynesian small open economy model in the tradition of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003) using Bayesian estimation techniques on Swedish data. To account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank's instrument rule. A key equation in the model - the uncovered interest rate parity (UIP) condition - is well known to be rejected empirically. Therefore we explore the consequences of modifying the UIP condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate. The results show that the modification increases the persistence and volatility in the real exchange rate and that this model has an empirical advantage compared with the standard UIP specification.

Keywords: DSGE, VAR, VECM, Open economy, Bayesian inference

JEL Classification: E17, C11, C53

Suggested Citation

Adolfson, Malin and Linde, Jesper and Laseen, Stefan and Villani, Mattias, Evaluating an Estimated New Keynesian Small Open Economy Model (February 8, 2007). Riksbank Research Paper Series No. 203. Available at SSRN: https://ssrn.com/abstract=1022021 or http://dx.doi.org/10.2139/ssrn.1022021

Malin Adolfson (Contact Author)

Sveriges Riksbank ( email )

Brunkebergstorg 11
103 37 Stockholm
Sweden

Jesper Linde

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden
+46 8 787 0873 (Phone)

HOME PAGE: http://www.riksbank.com

Stefan Laseen

Sveriges Riksbank - Monetary Policy Department ( email )

S-103 37 Stockholm
Sweden

Mattias Villani

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden

HOME PAGE: http://www.riksbank.com/research/villani

Stockholm University - Department of Statistics ( email )

Universitetsvägen 10
Stockholm, Stockholm SE-106 91
Sweden

HOME PAGE: http://www.riksbank.com/research/villani

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