Scandinavian Working Papers in Economics

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

No 167: Monetary Policy in an Estimated Open-Economy Model with Imperfect Pass-Through

Jesper Lindé (), Marianne Nessén () and Ulf Söderström ()
Additional contact information
Jesper Lindé: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Marianne Nessén: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Ulf Söderström: Università Bocconi, Postal: Department of Economics and IGIER, Via Salasco 5, 20136 Milano, Italy

Abstract: We develop a structural model of a small open economy with gradual exchange rate pass-through and endogenous inertia in inflation and output. We then estimate the model by matching the implied impulse responses with those obtained from a VAR model estimated on Swedish data. Although our model is highly stylized it captures very well the responses of output, domestic and imported inflation, the interest rate, and the real exchange rate. However, in order to account for the observed persistence in the real exchange rate and the large deviations from UIP, we need a large and volatile premium on foreign exchange.

Keywords: structural open-economy model; new open-economy macroeconomics; estimation; calibration

JEL-codes: E52; F31; F41

59 pages, June 1, 2004

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