Practical Model-Based Monetary Policy Analysis: A How-To Guide
69 Pages Posted: 17 May 2006
Date Written: March 2006
This paper provides a how-to guide to model-based forecasting and monetary policy analysis. It describes a simple structural model, along the lines of those in use in a number of central banks. This workhorse model consists of an aggregate demand (or IS) curve, a price-setting (or Phillips) curve, a version of the uncovered interest parity condition, and a monetary policy reaction function. The paper discusses how to parameterize the model and use it for forecasting and policy analysis, illustrating with an application to Canada. It also introduces a set of useful software tools for conducting a model-consistent forecast.
Keywords: Monetary Policy, Forecasting and Simulation, Model construction and estimation, computation techniques
JEL Classification: E52, E47, C51, C63
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