Scandinavian Working Papers in Economics

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

No 140: Can a Calibrated New-Keynesian Model of Monetary Policy Fit the Facts?

Ulf Söderström (), Paul Söderlind () and Anders Vredin ()
Additional contact information
Ulf Söderström: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Paul Söderlind: Department of Finance, Postal: Stockholm School of Economics, Box 6501, SE-113 83 Stockholm, Sweden
Anders Vredin: Research Department, Central Bank of Sweden, 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, September 1, 2002

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Published as
Ulf Söderström, Paul Söderlind and Anders Vredin, (2005), 'New-Keynesian models and monetary policy: A reexamination of the stylized facts', Scandinavian Journal of Economics, vol 107, no 3, pages 521-546

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