Estimation of monetary policy preferences in a forward-looking model: a Bayesian approach. NBB Working Papers No. 129, 13 March 2008

In this paper, we adopt a Bayesian approach to estimating monetary policy preference parameters in a general equilibrium framework. We start out from the model presented by Smets and Wouters (2003) for the euro area, where, in the original set-up, monetary policy behaviour is described by an empirical rule. We abandon this way of representing monetary policy behaviour and instead assume that monetary policy authorities optimise an intertemporal quadratic loss function under commitment. We consider two alternative specifications for the loss function. The first specification includes inflation, the output gap and difference in the interest rate as target variables. The second loss function includes an additional wage inflation target. The weights assigned to the target variables in the loss functions, i.e. the preferences of monetary policy, are estimated jointly with the structural parameters in the model. The results imply that inflation variability remains the main concern of optimal monetary policy. In addition, interest rate smoothing and the output gap appear to be important target variables as well, albeit to a lesser extent. Comparing the marginal likelihood of the original Smets and Wouters (2003) model to our specification with optimal monetary policy indicates that the latter performs only slightly worse. Since we are faced with the time-inconsistency problem under commitment, we initialise our estimates by considering a pre-sample period of 40 quarters. This enables an empirical approach to the timeless perspective framework

Formalization of Indistinct Expert Representations about the Object of Research

It is offered additional possibilities on increase of expert’s estimations accuracy of by introduction in base model the factors considering a "pessimistic" or "optimistic" spirit of the expert and providing in next automated correction of the examination result.Model, Expert, Optimistic, Pessimistic, Automated correction.

Estimation of monetary policy preferences in a forward-looking model : a Bayesian approach

In this paper we adopt a Bayesian approach towards the estimation of the monetary policy preference parameters in a general equilibrium framework. We start from the model presented by Smets and Wouters (2003) for the euro area where, in the original set up, monetary policy behaviour is described by an empirical Taylor rule. We abandon this way of representing monetary policy behaviour and assume, instead, that monetary policy authorities optimize an intertemporal quadratic loss function under commitment. We consider two alternative specifications for the loss function. The first specification includes inflation, output gap and difference in the interest rate as target variables. The second loss function includes an additional wage inflation target. The weights assigned to the target variables in the loss functions, i.e. the preferences of monetary policy, are estimated jointly with the structural parameters in the model. The results imply that inflation variability remains the main concern of optimal monetary policy. In addition, interest rate smoothing and the output gap appear to be, to a lesser extent, important target variables as well. Comparing the marginal likelihood of the original Smets and Wouters (2003) model to our specification with optimal monetary policy indicates that the latter performs only slightly worse. Since we are faced with the time-inconsistency problem under commitment, we initialize our estimates by considering a presample period of 40 quarters. This allows us to approach, empirically, the timeless perspective framework.optimal monetary policy, commitment, central bank preferences, euro area monetary policy

Optimal Monetary Policy Rules for the Euro Area in a DSGE Framework

This paper evaluates optimal monetary policy rules within the context of a dynamic stochastic general equilibrium model estimated for the Euro Area. Under assumption of an ad hoc loss function for the central bank, we compute the unconditional losses both under discretion and commitment. We compare the performance of unrestricted optimal rules to the performance of optimal simple rules. The results indicate that there are considerable gains from commitment over discretion, probably due to the stabilization bias present under discretion. The lagged variant of the Taylor type of rule that allows for interest rate inertia does relatively well in approaching the performance of the unrestricted optimal rule derived under commitment. On the other hand, simple rules expressed in terms of forecasts to next period's inflation rate seem to perform relatively worse.monetary policy, discretion, commitment

Optimal Monetary Policy rules for the Euro area in a DSGE framework

This paper evaluates optimal monetary policy rules within the context of a dynamic stochastic general equilibrium model estimated for the Euro Area. Under assumption of an ad hoc loss function for the central bank, we compute the unconditional losses both under discretion and commitment. We compare the performance of unrestricted optimal rules to the performance of optimal simple rules. The results indicate that there are considerable gains from commitment over discretion, probably due to the stabilization bias present under discretion. The lagged variant of the Taylor type of rule that allows for interest rate inertia does relatively well in approaching the performance of the unrestricted optimal rule derived under commitment. On the other hand, simple rules expressed in terms of forecasts to next period’s inflation rate seem to perform relatively worse.optimal rules, commitment, discretion, stabilization bias

The Intellectual Training Environment for Prolog Programming Language

In this work is described a new complex training system, named SPprolog, intended for training and self-training in logic programming language - Prolog. This system includes elements related to Prolog and logic programming, and the elements of independent, complex, self-sufficient training system which is capable considerably to increase the quality of self-training, and to be effective assistant in training. The most useful application of the system can be in distance education and self-training. The main elements of SPprolog system are: Functionally expanded (in comparison with existing systems) Prolog development environment, with the multipurpose code editor, the automated organization system of the personal tools, automated advice mode "Expert Advice", based on the incorporated expert system for cultivated, effective and optimized programming; Link to foreign Prolog programs compiler which allow to compile the program to independent executable; Built in intellectual, interactive, multimedia Prolog interpreter integrated with expert system and the elements of the intellectuality, allowing to lead detailed program interpretation, with popular and evident, explanation of the theory and mechanisms used in it, applying audiovisual effects to increase the level of naturalness of process of explanation; Full digital training course of Prolog programming language presented in the form of the matrix of knowledge and supplied system of consecutive knowledge reproduction for self-training and evaluation; an intensive course of training to the Prolog language and Spprolog system, based on the programmed, consecutive set of actions, allowing using the previous two mechanisms of sys-tem for popular and evident explanation of the main principles of work of system and Prolog language.training, prolog, environment, Spprolog

Measuring Core Inflation for Turkey - Trimmed Means Approach

This paper is one of the the pioneers in measuring the core inflation for Turkey and uses the methodology developed by Bryan, Cecchetti and Wiggins II (1997). As the price change distributions are not normally distributed, weighted sample means are not the efficient estimators of inflation. In such leptokurtic distributions trimmed means provide statistically more efficient estimators of inflation. For the consumer prices, using historical data, the optimal trim is found to be 19 percent from the each tail of the cross sectional distribution and for the wholesale prices it is found to be 12 percent (percentage that minimizes MAD). Trimmed mean estimators of inflation move in line with the headline inflation in the long run, implying a potential use for future inflation forecasting.Core Inflation, Trimmed Mean Estimators, Turkey

Enterprise, Innovation and the Enviroment

This report aims to profile the activity of small and medium sized enterprises (SME) operating in the UK's environmental sector. The environmental sector is expected to be critical for the future economic development of the UK supporting a new low carbon economy. As many entrepreneurial and innovative firms require significant funding to support their innovative activities this report specifically investigates the innovation activity and financial requirements UK environmental companies. The survey report highlights the role of a variety of funding sources, including public investment for supporting these firms, particularly those active in R&D. Responding firms show a strong record of performance to date, particularly R&D active companies but also have expectations of additional finance being made available for the future in the form of loans, equity finance and government funding

Survey of the literature on innovation and economic performance

Despite very strong differences in their treatment of technological change in economic theory, both the neoclassical and the more Schumpetarian (and evolutionary) economic approaches often assume that market selection rewards the most innovative firms. However, despite such strong assumptions, empirical evidence on whether innovative firms perform better than non-innovative firms remains inconclusive. If innovators do not grow more, does this imply that market selection fails? And does the different impact of innovation on industrial performance (measured by firm growth and profitability) and financial performance (measured by market value and stock returns) signal differences in how industrial and financial markets react to firm level efforts around innovation? This discussion paper reviews the literature on the interaction between innovation and economic/financial performance, and outlines the way that work within FINNOV Work Package 2 (SELECTION), Co-Evolution of Industry Dynamics and Financial Dynamics, will contribute to better understanding this interaction