Optimal Monetary Policy in an Operational Medium-Sized DSGE Model

54 Pages Posted: 20 Sep 2011

See all articles by Jesper Lindé

Jesper Lindé

Sveriges Riksbank - Research Division

Malin Adolfson

Sveriges Riksbank

Stefan Laseen

Sveriges Riksbank - Monetary Policy Department

Lars E. O. Svensson

Stockholm School of Economics; Stockholm University - Institute for International Economic Studies (IIES); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 4 versions of this paper

Date Written: July 28, 2011

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 our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incoporates large international spillover effects.

Keywords: Optimal monetary policy, instrument rules, optimal policy projections, open-economy DSGE models

Suggested Citation

Linde, Jesper and Adolfson, Malin and Laseen, Stefan and Svensson, Lars E.O., Optimal Monetary Policy in an Operational Medium-Sized DSGE Model (July 28, 2011). FRB International Finance Discussion Paper, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1931006 or http://dx.doi.org/10.2139/ssrn.1931006

Jesper Linde (Contact Author)

Sveriges Riksbank - Research Division ( email )

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

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

Malin Adolfson

Sveriges Riksbank ( email )

Brunkebergstorg 11
103 37 Stockholm
Sweden

Stefan Laseen

Sveriges Riksbank - Monetary Policy Department ( email )

S-103 37 Stockholm
Sweden

Lars E.O. Svensson

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

HOME PAGE: http://larseosvensson.se

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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