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13
May
2014

SIMPLE MONETARY POLICY RULES UNDER MODEL UNCERTAINTY: Comparison of Basic Model Properties 2

The TAYMCM model disaggregates IS components further; for example, spending on fixed investment is separated into three components: equipment, nonresidential structures, and residential construction. The specification of these equations is very similar to that of the more aggregated equations in the MSR model. In TAYMCM, imports follow partial adjustment to a equilibrium level that depends on U.S. income and the relative price of imports, while exports display partial adjustment to an equilibrium level that depends on foreign output and the relative price of exports. Uncovered interest rate parity determines each bilateral exchange rate (up to a time-varying risk premium); e.g., the expected one-period-ahead percent change in the DM/$ exchange rate equals the current difference between U.S. and German short-term interest rates.

The FRB model features about the same level of aggregation as TAYMCM for private spending but divides government spending into six components, each of which follows a simple reduced-form equation that includes a counter-cyclical term. The specification of most non-trade private spending equations follows Tinsley’s (1993) generalized adjustment cost model. payday loans with bad credit

Each component has a specific flow or stock equilibrium condition; for example, equilibrium aggregate consumption is proportional to wealth. Households and businesses adjust their spending in each category according to the solution of a quadratic adjustment cost problem.

The TAYMCM model disaggregates IS components further; for example, spending on fixed investment is separated into three components: equipment, nonresidential structures, and residential construction. The specification of these equations is very similar to that of the more aggregated equations in the MSR model. In TAYMCM, imports follow partial adjustment to a equilibrium level that depends on U.S. income and the relative price of imports, while exports display partial adjustment to an equilibrium level that depends on foreign output and the relative price of exports. Uncovered interest rate parity determines each bilateral exchange rate (up to a time-varying risk premium); e.g., the expected one-period-ahead percent change in the DM/$ exchange rate equals the current difference between U.S. and German short-term interest

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