Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/144342
Authors: 
Ilbas, Pelin
Year of Publication: 
2008
Series/Report no.: 
Working Paper Research 129
Abstract: 
In this paper we adopt a Bayesian approach towards the estimation of the monetary policy preference parameters in a general equilibrium framework. We start from the model presented by Smets and Wouters (2003) for the euro area where, in the original set up, monetary policy behaviour is described by an empirical Taylor rule. We abandon this way of representing monetary policy behaviour and assume, instead, that monetary policy authorities optimize an intertemporal quadratic loss function under commitment. We consider two alternative specifications for the loss function. The first specification includes inflation, output gap and difference in the interest rate as target variables. The second loss function includes an additional wage inflation target. The weights assigned to the target variables in the loss functions, i.e. the preferences of monetary policy, are estimated jointly with the structural parameters in the model. The results imply that inflation variability remains the main concern of optimal monetary policy. In addition, interest rate smoothing and the output gap appear to be, to a lesser extent, important target variables as well. Comparing the marginal likelihood of the original Smets and Wouters (2003) model to our specification with optimal monetary policy indicates that the latter performs only slightly worse. Since we are faced with the time-inconsistency problem under commitment, we initialize our estimates by considering a presample period of 40 quarters. This allows us to approach, empirically, the timeless perspective framework.
Subjects: 
optimal monetary policy
commitment
central bank preferences
euro area monetary policy
JEL: 
E42
E52
E58
E61
Document Type: 
Working Paper

Files in This Item:
File
Size
694.65 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.