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The Economic Research Institute, Stockholm School of Economics SSE/EFI Working Paper Series in Economics and Finance

No 511:
New-Keynesian Models and Monetary Policy: A Reexamination of the Stylized Facts

Ulf Söderström (), Paul Söderlind () and Anders Vredin ()

Abstract: Using an empirical New-Keynesian model with optimal discretionary monetary policy, we calibrate key parameters - the central bank's preference parameters; the degree of forward-looking behavior in the determination of inflation and output; and the variances of inflation and output shocks - to match some broad characteristics of U.S. data. Our preferred parameterizations all imply a small concern for output stability but a large preference for interest rate smoothing, and a small degree of forward-looking behavior in price-setting but a large degree of forward-looking in the determination of output. We provide some intuition for these results and discuss their consequences for practical monetary policy analysis.

Keywords: Interest rate smoothing; central bank objectives; forward-looking behavior; (follow links to similar papers)

JEL-Codes: E52; E58; (follow links to similar papers)

31 pages, September 18, 2002, Revised October 1, 2003

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