Finance and Economics Discussion Series (FEDS)
July 1998
Monetary Policy in a Stochastic Equilibrium Model with Real and Nominal Rigidities
Jinill Kim
Abstract:
A dynamic stochastic general-equilibrium (DSGE) model with real and nominal rigidities succeeds in capturing some key nominal features of U.S. business cycles. Monetary policy is specified following the developments in the structural vector autoregression (VAR) literature. Four shocks, including both technology and monetary policy shocks, affect the economy. Interaction between real and nominal rigidities is essential to reproduce the liquidity effect of monetary policy. The model is estimated by maximum likelihood on U.S. data. The model's fit is as good as that of an unrestricted first-order VAR and that the estimated model produces reasonable impulse responses and second moments. An increase of interest rates predicts a decrease of output two to six quarters in the future. This feature of U.S. business cycles has never been captured by previous research with DSGE models. Lastly, the policy implications are discussed.
Full paper (628 KB Postscript)Keywords: Monetary policy, maximum likelihood estimation, additive technology shocks, liquidity effect
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.