Two DSGE models are calibrated and simulated to investigate how the role of monetary policy differs between a closed and an open economy. The central bank conducts monetary policy according to a Taylor (1993) rule, reacting to inflation- and output deviations. Prices are sticky and there are habit components which slow down adjustment of consumption and exports. The models are subjected to shocks in the interest rate, inflation, technology and consumption. In most of the cases the shocks have a bigger and quicker affect on output and employment in the open economy. In connection with positive consumption- and interest rate shocks inflation is big and negative at first but gets positive already two quarters after the shock, due to effects in the exchange rate channel. In closed and open economies, a stronger reaction to output, than in the standard Taylor (1993) rule, decreases welfare losses dramatically.
Contents
1 INTRODUCTION
2 CLOSED MODEL
2.1 Important notations
2.2 Households
2.3 Firms
2.4 The Central Bank
3 OPEN MODEL
3.1 Some useful identities
3.2 Households
3.3 Firms
3.4 The Central Bank
4 CALIBRATION AND RESULTS
4.1 Calibration
4.2 Results
6 CONCLUSION
REFERENCE LIST
APPENDIX A Expenditure shares on home and foreign goods
APPENDIX B Output equals consumption in steady state
APPENDIX C Different linearizations of the CPI formula
APPENDIX D Dynare code
APPENDIX E Additional dynamics
Author: Mickelsson, Glenn
Source: Uppsala University Library
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