A 2-equation model of the North Atlantic economies, a dynamic panel study
Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy to replace the conventional IS-LM-AS model. One of their new equations is a monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC....
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Salt Lake City, UT: The University of Utah, Department of Economics
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ftzbwkiel:oai:econstor.eu:10419/64440 2023-12-03T10:26:40+01:00 A 2-equation model of the North Atlantic economies, a dynamic panel study Kiefer, David 2010 http://hdl.handle.net/10419/64440 eng eng Salt Lake City, UT: The University of Utah, Department of Economics Series: Working Paper No. 2010-06 gbv-ppn:638661285 http://hdl.handle.net/10419/64440 http://www.econstor.eu/dspace/Nutzungsbedingungen ddc:330 E61 E63 New Keynesian Kalman filtering open economies doc-type:workingPaper 2010 ftzbwkiel 2023-11-06T00:41:16Z Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy to replace the conventional IS-LM-AS model. One of their new equations is a monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. They label their replacement model the IS-PC-MR. Central banks achieve the PC-MR solution by setting interest rates along an IS curve. Observing that governments have more tools than just the interest rate, we simplify their model to 2 equations. We develop a state space econometric specification as the solution of these equations, adding a random walk model of the unobserved potential growth. Applying this method to a panel of North Atlantic countries, we find it historically consistent with a few qualifications. For one, governments are more likely to target growth rates, than output gaps. And, inflation expectations are more likely backward looking, than rational, but a two-step estimation based on a forward-looking sticky-price model dramatically improves the empirical fit. Significant interdependence can be seen in the between-country covariance of inflation and growth shocks. Report North Atlantic EconStor (German National Library of Economics, ZBW) |
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EconStor (German National Library of Economics, ZBW) |
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language |
English |
topic |
ddc:330 E61 E63 New Keynesian Kalman filtering open economies |
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ddc:330 E61 E63 New Keynesian Kalman filtering open economies Kiefer, David A 2-equation model of the North Atlantic economies, a dynamic panel study |
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ddc:330 E61 E63 New Keynesian Kalman filtering open economies |
description |
Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy to replace the conventional IS-LM-AS model. One of their new equations is a monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. They label their replacement model the IS-PC-MR. Central banks achieve the PC-MR solution by setting interest rates along an IS curve. Observing that governments have more tools than just the interest rate, we simplify their model to 2 equations. We develop a state space econometric specification as the solution of these equations, adding a random walk model of the unobserved potential growth. Applying this method to a panel of North Atlantic countries, we find it historically consistent with a few qualifications. For one, governments are more likely to target growth rates, than output gaps. And, inflation expectations are more likely backward looking, than rational, but a two-step estimation based on a forward-looking sticky-price model dramatically improves the empirical fit. Significant interdependence can be seen in the between-country covariance of inflation and growth shocks. |
format |
Report |
author |
Kiefer, David |
author_facet |
Kiefer, David |
author_sort |
Kiefer, David |
title |
A 2-equation model of the North Atlantic economies, a dynamic panel study |
title_short |
A 2-equation model of the North Atlantic economies, a dynamic panel study |
title_full |
A 2-equation model of the North Atlantic economies, a dynamic panel study |
title_fullStr |
A 2-equation model of the North Atlantic economies, a dynamic panel study |
title_full_unstemmed |
A 2-equation model of the North Atlantic economies, a dynamic panel study |
title_sort |
2-equation model of the north atlantic economies, a dynamic panel study |
publisher |
Salt Lake City, UT: The University of Utah, Department of Economics |
publishDate |
2010 |
url |
http://hdl.handle.net/10419/64440 |
genre |
North Atlantic |
genre_facet |
North Atlantic |
op_relation |
Series: Working Paper No. 2010-06 gbv-ppn:638661285 http://hdl.handle.net/10419/64440 |
op_rights |
http://www.econstor.eu/dspace/Nutzungsbedingungen |
_version_ |
1784276055045963776 |