BANK OF FINLAND DISCUSSION PAPERS

Transcription

1 BANK OF FINLAND DISCUSSION PAPERS Mika Kortelainen Research Department Actual and perceived monetary policy rules in a dynamic general equilibrium model of the euro area Suomen Pankin keskustelualoitteita Finlands Banks diskussionsunderlag

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3 BANK OF FINLAND DISCUSSION PAPERS Mika Kortelainen Research Department Actual and perceived monetary policy rules in a dynamic general equilibrium model of the euro area The views expressed are those of the author and do not necessarily reflect the views of the Bank of Finland. This work was conducted in co-operation with Juha Tarkka. I thank Jarmo Kontulainen, Hanna- Leena Männistö, David Mayes, Antti Ripatti and Jouko Vilmunen for useful comments and the ECB Directorate General Research for the kind permission to use some of their euro area data. A previous version of this paper was presented at the Bank of Canada workshop on Advances in Macroeconomic Model Building, August 17 18, I thank all the participants of the Bank of Canada workshop for useful comments and especially Ben Hunt for the kind permission to include his written comments in this paper. Remaining errors are mine. Suomen Pankin keskustelualoitteita Finlands Banks diskussionsunderlag

4 ISBN ISSN (print) ISBN ISSN (online) Suomen Pankin monistuskeskus Helsinki 2001

5 Actual and perceived monetary policy rules in a dynamic general equilibrium model of the euro area Bank of Finland Discussion Papers 3/2001 Mika Kortelainen Research Department Abstract We present a dynamic general equilibrium model with some nominal rigidities and calibrate it to euro area data. The most important features of the model include consumption/saving decisions according to Blanchard s stochastic lifetimes approach; valuation of private financial wealth according to the present value of capital income; overlapping Calvo wage contracts in the labour market; and a neoclassical supply side with Cobb-Douglas technology. The model is developed for use in analysing differences between perceived and actual monetary policy rules, which is then done as a means of evaluating the macroeconomic benefits of credibility in monetary policy. General properties of the model are analysed with a variety of simulation experiments. Key words: EDGE, rational expectation, DGE models, nominal rigidites 3

6 Odotettu ja toteutuva rahapolitiikan sääntö euroalueen dynaamisessa yleisen tasapainon mallissa Suomen Pankin keskustelualoitteita 3/2001 Mika Kortelainen Tutkimusosasto Tiivistelmä Tässä tutkimuksessa esitetään kalibroitu euroalueen dynaaminen yleisen tasapainon malli, jossa on nimellisiä jäykkyyksiä. Mallin tärkeimmät ominaisuudet sisältävät Blanchardin stokastisen eliniän kulutus-/säästämispäätökset, yksityisen pääomavarallisuuden arvostamisen pääomatulojen nykyarvona, työmarkkinoiden limittäiset Calvo-sopimukset ja neoklassisen tarjonnan Cobb-Douglas hyötyfunktiolla. Malli on kehitetty, jotta voidaan arvioida odotetun ja toteutuvan rahapolitiikan sääntöjen eroja. Mallia hyödynnetään rahapolitiikan uskottavuuden makrotaloudellisten vaikutusten arvioinnissa. Mallin yleisiä ominaisuuksia tutkitaan joukolla simulointikokeita. Asiasanat: EDGE, rationaaliset odotukset, dynaaminen yleisen tasapainon malli, nimelliset jäykkyydet 4

7 Contents Abstract Introduction The model specification The dynamic model Consumption Firm behaviour Prices and wages Rest of the dynamic model The steady-state model Calibration Parameter choices Solving the model Diagnostic simulations A permanent increase in public consumption A temporary depreciation of the exchange rate A temporary increase in the interest rate A permanent increase in labour force A temporary increase in direct tax rate A permanent increase in world demand A permanent increase in indirect tax rate A permanent increase in equity premium A permanent increase in inflation target Analysis of monetary policy credibility Case I: Central bank sets interest rates on the basis of actual economic situation Case II: Central bank sets interest rate on the basis of its forecast and assumes that it is credible Conclusions References Figures Tables Appendix 1 List of equations of EDGE-model Appendix 2 List of equations of steady state of EDGE-model Appendix 3 Comments by Ben Hunt

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