Estimated general equilibrium models for the evaluation of monetary policy in the US and Europe

Abstract

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How optimal is US monetary policy?

“…3 See for example Smets and Wouters (2003), Christiano, Eichenbaum, and Evans (2005) and Leith and Malley (2005). 4 Note that this utility specification is slightly different from that in Lubik and Schorfheide (2005) who adopt the following specification,…”

Optimal monetary policy in a New Keynesian model with habits in consumption

“…As a means of accounting for such patterns, some authors have augmented the benchmark model with various forms of habits effects in consumption. The habits effects can either be internal (see for example, Fuhrer (2000), Christiano, Eichenbaum, and Evans (2005), Leith and Malley (2005)) or external (see, for example, Smets and Wouters (2007)) the latter reflecting a catching up with the Joneses effect whereby households fail to internalise the externality their own consumption causes on the utility of other households. Both forms of habits behaviour can help the New Keynesian monetary policy model capture the persistence found in the data (see, for example Kozicki and Tinsley (2002)), although the policy implications are likely to be different.…”

The price puzzle revisited: Can the cost channel explain a rise in inflation after a monetary policy shock?

“…Rabanal and Rubio-Ramirez (2003) report a smaller estimate with an average duration of 1.2 quarters, while Smets and Wouters (2003) and Leith and Malley (2005) propose value of 4.1 and 7.7, respectively.…”

“…Leith and Malley (2005) who also apply the complete indexation framework report a share of 17%. Using a partial indexation model Smets and Wouters (2003) estimate the degree of wage indexation to be 0.66, while Rabanal and Rubio-Ramirez (2003) report a value of 0.34.…”

“…The empirical evidence on the degree of partial indexation of prices to past inflation rates in the euro area vary from 0.29 to 0.75. Leith and Malley (2005) estimated a value of 0.29, while Coenen, McAdam, and Straub (2007) propose to calibrate the degree of indexation to a value of 0.75.…”