A Comparison Analysis of Monetary Policy Effect Under an Open Economy Model
36 Pages Posted: 2 Jul 2018
Date Written: June 30, 2018
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: Suggested Citation