Monetary policy trade-offs in an estimated open-economy DSGE model

This paper studies the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank׳s estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy. Our main finding is that the trade-off between stabilizing CPI inflation and...

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Bibliographic Details
Published in:Journal of economic dynamics & control 2014-05, Vol.42, p.33-49
Main Authors: Adolfson, Malin, Laséen, Stefan, Lindé, Jesper, Svensson, Lars E.O.
Format: Article
Language:English
Subjects:
Consumer Price Index
Economic theory
General economic equilibrium
Inflation
Instrument rules
Monetary policy
Open economies
Open-economy DSGE models
Optimal monetary policy
Output
Output gap
Potential output
Stochastic processes
Studies
Trade-off
Tradeoff analysis
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Summary:This paper studies the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank׳s estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy. Our main finding is that the trade-off between stabilizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.
ISSN:0165-1889
1879-1743
1879-1743
DOI:10.1016/j.jedc.2014.02.012