Seminar Papers, Institute for International Economic Studies, Stockholm University
An Estimated DSGE Model for Sweden with a Monetary Regime Change
() and Daria Finocchiaro
Abstract: Using Bayesian methods, we estimate a small open economy
model for Sweden. We explicitly account for a monetary regime change from
an exchange rate target zone to flexible exchange rates with explicit
inflation targeting. In each of these regimes, we analyze the behavior of
the monetary authority and the relative contribution to the business cycle
of structural shocks in detail. Our results can be summarized as follows.
Monetary policy is mainly concerned with stabilizing the exchange rate in
the target zone and with price stability in the inflation targeting regime.
Expectations of realignment and the risk premium are the main sources of
volatility in the target zone period. In the inflation targeting period,
monetary shocks are important sources of volatility in the short run, but
in the long run, labor supply and preference shocks become relatively more
important. Foreign shocks are much more destabilizing under the target zone
than under inflation targeting.
Keywords: Bayesian estimation; DSGE models; target zone; inflation targeting; regime change; (follow links to similar papers)
JEL-Codes: C10; C30; E50; (follow links to similar papers)
59 pages, October 1, 2005
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