A Comparison Analysis of Monetary Policy Effect Under an Open Economy Model

36 Pages Posted: 2 Jul 2018

See all articles by Keun Yeong Lee

Keun Yeong Lee

Sungkyunkwan University - Department of Economics

Date Written: June 30, 2018

Abstract

The paper analyzes and compares the effects of domestic monetary policy using DSGE, DSGE-VAR, and VAR based on a two-country open economy model of Korea and the U.S. According to impulse response analysis, a domestic interest rate hike raises won value in the case of DSGE and DSGE-VAR models, while in the case of the unrestricted VAR model, it lowers won value. In the marginal data density standard, DSGE-VAR (μ=1) is superior to DSGE or Bayesian VAR over the sample period. Conversely, in the in-sample RMSE criterion, especially for the won/dollar exchange rate, VARs are superior to DSGE or DSGE-VAR. It is necessary to study further if these differences are caused by model misspecification or omitted variable bias.

Keywords: DSGE, DSGE-VAR, Bayesian VAR, Marginal Data Density, RMSE

JEL Classification: E1, E5, F3, F4

Suggested Citation

Lee, Keun Yeong, A Comparison Analysis of Monetary Policy Effect Under an Open Economy Model (June 30, 2018). East Asian Economic Review Vol. 22, No. 2 (June 2018) 141-176, DOI: http://dx.doi.org/10.11644/KIEP.EAER.2018.22.2.341 , Available at SSRN: https://ssrn.com/abstract=3206426 or http://dx.doi.org/10.2139/ssrn.3206426

Keun Yeong Lee (Contact Author)

Sungkyunkwan University - Department of Economics ( email )

110-745 Seoul

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