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Empirical and policy performance of a forward-looking monetary model, comments

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Disciplines
  • Economics
  • Medicine

Abstract

Jeff_Fuhrer.ppt Empirical and Policy Performance of a Forward-Looking Monetary Model Alexei Onatski and Noah Williams FRB San Francisco Conference on “Interest Rates and Monetary Policy” March 19-20, 2004 Comments by Jeff Fuhrer FRB Boston The authors are to be applauded and I mean that • For moving beyond “toy” models – Incorporating recent advances in consumption, investment for monetary models • For taking the data seriously – Empirical performance is a success criterion in this paper • For using rigorous empirical standards – Serious estimation – Serious diagnostics (Impulse responses, covariance functions, etc.) The result: A Sophisticated Model- About-Town Start with canonical model • Add habits, indexing in wages and prices, higher-order adjustment costs in investment • Add autocorrelated errors (r=.9,.95,.98) • And voila! The model really works! 1 1 * 1 (1 )[ ( ) ( )] p t t t t t b t t t t r t t t t t t t E y c E c i i a b y y p p g e e r r p p e + + - = + + = + = + - - + - + This model really works! Response to inflation target shock Nice, hump-shaped responses, fairly data-consistent Consumption Inflation Investment Real wage But what are the relative contributions of shocks, frictions, and deep structure to dynamics? • Run impulse responses with – Full model – Model with all r’s set to zero – Model with all r’s set to zero, “frictions” set to zero: habits, indexing, policy smoothing (h=0, gw=0, gp=0, r=0) – Nice accounting of where the action is coming from in the model This model really works: ALMOST Response to preference shock, with and without AC errors, frictions It’s all in the shocks (for preference shock) Consumption Inflation Investment Real wage This model really works: ALMOST Response to inflation target, with and without AC errors, frictions A lot’s in the shocks; everything is in shocks + frictions Consumption Inflation Investment Real wage Why am I whining

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