Posted

September 20, 2010 03:54:11 PM

Date

2003-09

Author

Matt Klaeffling

Affiliation

European Central Bank

Title

Macroeconomic Modelling of Monetary Policy

Summary /
Abstract

This paper proposes a new paradigm for the analysis of monetary policy. From an econometric point of view this new approach is just as easy to implement as reduced form analysis, but is robust to the Lucas critique. It requires no explicit prior theory and yet it encompasses all standard DSGE models.

After introducing this new paradigm I study US monetary policy and look at the nature and the effect of monetary policy, discuss the transmission mechanism and the policy rule implied by the data, and perform counterfactual policy analysis.

Source: ECB Working Paper Series No. 257

Keywords

DSGE Models, VAR Models, Monetary Policy, Rational Expectations,Lucas Critique, Empirical Time Series Modelling, Applied Macroeconomics

URL

http://www.ecb.int/pub/pdf/scpwps/ecbwp257.pdf

Remarks

This is an intriguing paper by an ECB staff member. He begins his paper by criticizing both DSGE and VAR modelling frameworks. He says that while VAR models are subject to the Lucas critique, DSGE models employ heroic assumptions about the structure of the economy ("Absent general agreement as to how relevant the first principles of neoclassical microeconomics are for a world characterized by incomplete markets, asymmetric information and heterogeneous agents, one may ask what informative value micro-structural models have for empirical macroeconomics."). He then proposes and tests (on U.S. data) a new semi-structural paradigm that nests DSGE and VAR models as restricted sub-cases. His proposal allows full empirical and counter-factual analysis in a simple estimated macro model, with simple instrumental variables (IV) estimation (GMM can also be used).

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