Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model

38 Pages Posted: 18 Dec 2008

See all articles by Malin Adolfson

Malin Adolfson

Sveriges Riksbank

Stefan Laseen

Sveriges Riksbank - Monetary Policy Department

Jesper Lindé

Sveriges Riksbank - Research Division

Lars E. O. Svensson

Stockholm School of Economics; Stockholm University - Institute for International Economic Studies (IIES); National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: December 2008

Abstract

This paper studies the transmission of shocks and the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank's empirical dynamic stochastic general equilibrium (DSGE) model of a small open economy. The main results are, first, that the transmission of shocks depends substantially on the conduct of monetary policy, and second, 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.

Keywords: impulse responses, instrument rules, open-economy DSGE models, Optimal monetary policy, output gap, potential output

JEL Classification: E52, E58

Suggested Citation

Adolfson, Malin and Laseen, Stefan and Linde, Jesper and Svensson, Lars E.O., Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model (December 2008). CEPR Discussion Paper No. DP7070, Available at SSRN: https://ssrn.com/abstract=1311193

Malin Adolfson

Sveriges Riksbank ( email )

Brunkebergstorg 11
103 37 Stockholm
Sweden

Stefan Laseen

Sveriges Riksbank - Monetary Policy Department ( email )

S-103 37 Stockholm
Sweden

Jesper Linde

Sveriges Riksbank - Research Division ( email )

S-103 37 Stockholm
Sweden
+46 8 787 0873 (Phone)

HOME PAGE: http://www.riksbank.com

Lars E.O. Svensson (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

HOME PAGE: http://larseosvensson.se

Stockholm University - Institute for International Economic Studies (IIES) ( email )

Stockholm, SE-10691
Sweden

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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