Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study
Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy, the IS-PC-MR model. Their third equation is the monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. Central banks achieve thei...
Main Author: | |
---|---|
Format: | Report |
Language: | unknown |
Subjects: | |
Online Access: | http://economics.utah.edu/research/publications/2011_15.pdf |
id |
ftrepec:oai:RePEc:uta:papers:2011_15 |
---|---|
record_format |
openpolar |
spelling |
ftrepec:oai:RePEc:uta:papers:2011_15 2023-05-15T17:33:15+02:00 Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study David Kiefer http://economics.utah.edu/research/publications/2011_15.pdf unknown http://economics.utah.edu/research/publications/2011_15.pdf preprint ftrepec 2020-12-04T13:43:34Z Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy, the IS-PC-MR model. Their third equation is the monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. Central banks achieve their preferred outcome by setting interest rates along an IS curve. We simplify their model to 2 equations (PC and MR), developing a state space econometric specification of this solution, and adding a random walk model of unobserved potential growth. Applying this model to a panel of North Atlantic countries, we find it historically consistent with an inflation target of about 4%. Significant interdependence is found in the between-country covariance of inflation and growth shocks, but not of potential output. Beginning with the approximation that expected inflation is the most recent observation, we extend the model to introduce alternative assumptions about expectations with mixed results, support for the sticky-price model, but doubts about activist policy. new Keynesian policy, inflation targets, expectations JEL Codes: E61, E63 Report North Atlantic RePEc (Research Papers in Economics) |
institution |
Open Polar |
collection |
RePEc (Research Papers in Economics) |
op_collection_id |
ftrepec |
language |
unknown |
description |
Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy, the IS-PC-MR model. Their third equation is the monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. Central banks achieve their preferred outcome by setting interest rates along an IS curve. We simplify their model to 2 equations (PC and MR), developing a state space econometric specification of this solution, and adding a random walk model of unobserved potential growth. Applying this model to a panel of North Atlantic countries, we find it historically consistent with an inflation target of about 4%. Significant interdependence is found in the between-country covariance of inflation and growth shocks, but not of potential output. Beginning with the approximation that expected inflation is the most recent observation, we extend the model to introduce alternative assumptions about expectations with mixed results, support for the sticky-price model, but doubts about activist policy. new Keynesian policy, inflation targets, expectations JEL Codes: E61, E63 |
format |
Report |
author |
David Kiefer |
spellingShingle |
David Kiefer Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study |
author_facet |
David Kiefer |
author_sort |
David Kiefer |
title |
Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study |
title_short |
Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study |
title_full |
Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study |
title_fullStr |
Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study |
title_full_unstemmed |
Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study |
title_sort |
stabilization and expectations in a state space model of interconnected economies, a dynamic panel study |
url |
http://economics.utah.edu/research/publications/2011_15.pdf |
genre |
North Atlantic |
genre_facet |
North Atlantic |
op_relation |
http://economics.utah.edu/research/publications/2011_15.pdf |
_version_ |
1766131685399724032 |