Scandinavian Working Papers in Economics

SSE/EFI Working Paper Series in Economics and Finance,
Stockholm School of Economics

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

Ulf Söderström (), Paul Söderlind () and Anders Vredin ()
Additional contact information
Ulf Söderström: Sveriges Riksbank, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Paul Söderlind: Dept. of Finance, Stockholm School of Economics, Postal: Stockholm School of Economics, P.O. Box 6501, SE-113 83 Stockholm, Sweden
Anders Vredin: Sveriges Riksbank, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

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

JEL-codes: E52; E58

31 pages, First version: September 18, 2002. Revised: October 1, 2003. Earlier revisions: August 15, 2003.

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