Scandinavian Working Papers in Economics
Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)
No 241: Monetary Regime Change and Business Cycles
Vasco Cúrdia and Daria Finocchiaro ()
Additional contact information
Vasco Cúrdia: Macroeconomic and Monetary Studies Function, Postal: Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045,
Daria Finocchiaro: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Abstract: This paper analyzes to what extent changes in monetary policy regimes influence the business cycle in a small open economy and investigates the impact of policy breaks on the estimation procedure. We estimate a DSGE model on Swedish data, explicitly taking into account the monetary regime change in 1993, from exchange rate targeting to inflation targeting. The results suggest that monetary policy reacted strongly to exchange rate movements in the former, and mostly to inflation in the latter. The external sector plays an important role in the economy and the international transmission mechanism is significantly affected by the choice of exchange rate regime. A counterfactual experiment that applies the inflation targeting policy rule on the disturbances from the exchange rate targeting period suggests that such a policy would have led to higher output and employment, but also to a depreciated currency, higher inflation and a more volatile economy. We also show evidence that ignoring the break in the estimation leads to spurious results for both the parameters associated with monetary policy as well as those that are policy-independent.
Keywords: Bayesian estimation; DSGE models; target zone; inflation targeting; regime change
62 pages, April 1, 2010
Full text files
wp241.pdf
Questions (including download problems) about the papers in this series should be directed to Lena Löfgren ()
Report other problems with accessing this service to Sune Karlsson ().
RePEc:hhs:rbnkwp:0241This page generated on 2024-09-13 22:16:57.