Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 225: Optimal Monetary Policy in an Operational Medium-Sized DSGE Model

Malin Adolfson (), Stefan Laseén (), Jesper Lindé () and Lars E.O. Svensson ()
Additional contact information
Malin Adolfson: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Stefan Laseén: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Jesper Lindé: Monetary Policy Department, Central Bank of Sweden, Sveriges Riksbank, SE-103 37 Stockholm, Sweden and CEPR
Lars E.O. Svensson: Central Bank of Sweden, Sveriges Riksbank, SE-103 37 Stockholm, Sweden, Princeton University, CEPR and NBER

Abstract: We show how to construct optimal policy projections in Ramses, the Riksbank’s openeconomy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable low inflation environment. Past policy of the Riksbank until 2007:3 (the end of the sample used) is better explained as following a simple instrument rule than as optimal policy under commitment. We show and discuss the differences between policy projections for the estimated instrument rule and for optimal policy under commitment, under alternative definitions of the output gap, different initial values of the Lagrange multipliers representing policy in a timeless perspective, and different weights in the central-bank loss function.

Keywords: Optimal monetary policy; instrument rules; optimal policy projections; openeconomy DSGE models

JEL-codes: E52; E58

62 pages, August 1, 2008

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wp225.pdf PDF-file 
wp225_technappx.pdf PDF-file Technical Appendix

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