url
21
May
2014

SIMPLE MONETARY POLICY RULES UNDER MODEL UNCERTAINTY: Comparison of Basic Model Properties 6

The lower panel of Figure 1 depicts the output gap autocorrelogram of each model.

In the FM model, the output gap is extremely persistent and displays some “over-shooting” in that the autocorrelation turns negative after five years. The FRB model output gap displays somewhat less persistence and more over-shooting than the FM model. The MSR and TAYMCM models—based on similar aggregate demand specifications—share the feature of a relatively low degree of output gap persistence, although it is slightly higher in the MSR model because the monetary policy response to inflation causes some of the persistence in inflation to spill over to output.

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To provide a more detailed comparison of the dynamic properties of aggregate demand across models, it is useful to consider the following regression equation: Electronic Payday Loans Online
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where rM – EM 7it is the lag of the ex ante real federal funds rate. The parameters indicates the degree of persistence (speed of error-correction) of the output gap; the parameter© indicates the extent to which the output gap exhibits a short-run accelerator effect; and the parameter ф indicates the sensitivity of aggregate demand to a change in the short-term real interest rate.

We use this simple specification to compare the basic properties of output dynamics between the models and to the data.

The lower panel of Figure 1 depicts the output gap autocorrelogram of each model. In the FM model, the output gap is extremely persistent and displays some “over-shooting” in that the autocorrelation turns negative after five years. The FRB model output gap displays somewhat less persistence and more over-shooting than the FM model. The MSR and TAYMCM models—based on similar aggregate demand specifications—share the feature of a relatively low degree of output gap persistence, although it is slightly higher in the MSR model because the monetary policy response to inflation causes some of the persistence in inflation to spill over to output. To provide a more detailed comparison of the dynamic properties of aggregate demand across models, it is useful

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Kevin J. Brandon

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