Towards a monetary policy evaluation framework

Advances in the development of Dynamic Stochastic General Equilibrium (DSGE) models towards medium-scale structural frameworks with satisfying data coherence have considerably enhanced the range of analytical tools well-suited for monetary policy evaluation. The present paper intends to make a step forward in this direction: using US data over the Volker-Greenspan sample, we perform a DGSE-VAR estimation of a medium-scale DSGE model very close to Smets and Wouters [2007] specification, where monetary policy is set according to a Ramsey-planner decision problem. Those results are then contrasted with the DSGE-VAR estimation of the same model featuring a Taylortype interest rate rule. Our results show in particular that the restrictions imposed by the welfare-maximizing Ramsey policy deteriorates the empirical performance with respect to a Taylor rule specification. However, it turns out that, along selected conditional dimensions, and notably for productivity shocks, the Ramsey policy and the estimated Taylor rule deliver similar economic propagation. JEL Classification: E4, E5, F4Bayesian estimation, DSGE Models, optimal monetary policy

Optimal monetary policy in an estimated DSGE for the euro area

The objective of this paper is to examine the main features of optimal monetary policy within a micro-founded macroeconometric framework. First, using Bayesian techniques, we estimate a medium scale closed economy DSGE for the euro area. Then, we study the properties of the Ramsey allocation through impulse response, variance decomposition and counterfactual analysis. In particular, we show that, controlling for the zero lower bound constraint, does not seem to limit the stabilization properties of optimal monetary policy. the Ramsey allocation reasonably well. Such optimal simple operational rules seem to react specifically to nominal wage inflation. Overall, the Ramsey policy together with its simple rule approximations seem to deliver consistent policy messages and may constitute some useful normative benchmarks within medium to large scale estimated DSGE framework. prove the economic micro-foundation and the econometric identification of the structural disturbances. We also present simple monetary policy rules which can “approximate” and implement However, this normative analysis based on estimated models reinforces the need to improve the economic micro-foundation and the econometric identification of the structural disburbances. JEL Classification: E4, E5Bayesian estimation, DSGE Models, monetary policy, Welfare calculations

Optimal monetary policy and the transmission of oil-supply shocks to the euro area under rational expectations

This paper presents first the estimation of a two-country DSGE model for the euro area and the rest-of-the-world including relevant oil-price channels. We then investigate the optimal resolution of the policy tradeoffs emanating from oil-price disturbances. Our simulations show that the inflationary forces related to the use of oil as an intermediate good seem to require specific policy actions in the optimal allocation. However, the direct effects of oil prices should be allowed to exert their mechanical influence on CPI inflation and wage dynamics through the indexation schemes. We also illustrate that any fine-tuning strategy which tries to counteract the direct effects of oil-price changes in headline inflation would prove counterproductive both in terms to stabilization of underlying inflation and by causing unnecessary volatility in the macroeconomic landscape. Finally, it appears that perfect foresight on future oil price developments allows a more rapid absorption of the steady state decline in purchasing power and real national income in the optimal allocation. Through the various expectation channels, economic agents facilitate the necessary adjustments and optimal monetary policy can still tolerate the direct effects of oil price changes on CPI inflation as well as some degree of underlying inflationary pressures in the view of easing partly the burden of downward real wage shifts. Our monetary policy prescriptions have been derived in a modeling framework where oil-price fluctuations are essentially exogenous to policy actions and where expectations are formed under the rational expectations paradigm. Notably, the extension of such conclusions to imperfect knowledge and weak central bank credibility configurations remain challenging fields for further research. JEL Classification: E4, E5, F4Bayesian estimation, new open economy macroeconomics, Oil prices, optimal monetary policy

How do Labor Market Institutions affect the Link between Growth and Unemployment: the case of the European countries

This paper analyzes how the frictions in the labor market simultaneously affect the economic growth and the long run unemployment. To this goal, we develop a schumpeterian model of endogenous growth: agents have the choice between employment and R and D activities. Unemployment is caused by the wage-setting behavior of unions. We show that: (i) Increases in the labor costs or in the power of trade unions lead to higher unemployment and lower economic growth. (ii) Efficient bargain allows to increase employment, at the price of a lower growth rate. These theoretical predictions are consistent with the insights from our empirical analysis based on 183 European Regions, between 1980-2003endogenous growth, unemployment, labor market institutions

Growth, Unemployment and Tax/Benefit system in European Countries

This paper analyzes how the frictions in the labor market simultaneously affect the economic growth and the long run unemployment. To this goal, we develop a Schumpeterian model of endogenous growth: agents have the choice of being employed or being doing R&D activities. Unemployment is caused by the wage-setting behavior of unions. We show that: (i) High labor costs or powerful trade unions lead to higher unemployment and lower economic growth. (ii) Efficient bargain allows to increase employment, at the price of a lower growth rate. These theoretical predictions are consistent with our empirical analysis based on 183 European Regions, between 1980-2003. Finally, in a welfare exercise, we show that the optimal growth rate can be reached by compensating the distortions on the goods-sector due to the growth process with the distortions induced by the labor market rigidities

Dynare: Reference Manual Version 4

Dynare is a software platform for handling a wide class of economic models, in particular dynamic stochastic general equilibrium (DSGE) and overlapping generations (OLG) models. The models solved by Dynare include those relying on the rational expectations hypothesis, wherein agents form their expectations about the future in a way consistent with the model. But Dynare is also able to handle models where expectations are formed differently: on one extreme, models where agents perfectly anticipate the future; on the other extreme, models where agents have limited rationality or imperfect knowledge of the state of the economy and, hence, form their expectations through a learning process. Dynare offers a user-friendly and intuitive way of describing these models. It is able to perform simulations of the model given a calibration of the model parameters and is also able to estimate these parameters given a dataset. Dynare is a free software, which means that it can be downloaded free of charge, that its source code is freely available, and that it can be used for both non-profit and for-profit purposes.Dynare; Numerical methods; Perturbation; Rational expectations

Growth, Unemployment and Tax/Benefit system in European Countries

This paper analyzes how the frictions in the labor market simultaneously affect the economic growth and the long run unemployment. To this goal, we develop a Schumpeterian model of endogenous growth: agents have the choice of being employed or being doing R&D activities. Unemployment is caused by the wage-setting behavior of unions. We show that: (i) High labor costs or powerful trade unions lead to higher unemployment and lower economic growth. (ii) Efficient bargain allows to increase employment, at the price of a lower growth rate. These theoretical predictions are consistent with our empirical analysis based on 183 European Regions, between 1980-2003. Finally, in a welfare exercise, we show that the optimal growth rate can be reached by compensating the distortions on the goods-sector due to the growth process with the distortions induced by the labor market rigidities

Dynare: Reference Manual. Version 4

Dynare is a software platform for handling a wide class of economic models, in particular dynamic stochastic general equilibrium (DSGE) and overlapping generations (OLG) models. The models solved by Dynare include those relying on the rational expectations hypothesis, wherein agents form their expectations about the future in a way consistent with the model. But Dynare is also able to handle models where expectations are formed differently: on one extreme, models where agents perfectly anticipate the future; on the other extreme, models where agents have limited rationality or imperfect knowledge of the state of the economy and, hence, form their expectations through a learning process. In terms of types of agents, models solved by Dynare can incorporate consumers, productive firms, governments, monetary authorities, investors and financial intermediaries. Some degree of heterogeneity can be achieved by including several distinct classes of agents in each of the aforementioned agent categories.JRC.G.3-Econometrics and applied statistic

Un regard bayésien sur les modèles dynamiques de la macroéconomie

Our article describes the Bayesian approach to the most highly regarded dynamic models in macroeconomics : DSGE (dynamic stochastic general-equilibrium) models and VAR (vector autoregressive) models. We present the main concepts in Bayesian analysis and show how to apply them to VAR models. We then explore the specific features of the Bayesian approach to DSGE models. Unlike VAR models, DSGE models cannot provide an analytical expression of the posterioi distribution. To overcome this difficulty we must resort to Monte-Carlo methods, whose main features we describe. Lastly , to underscore how sterile the VAR / DSGE opposition is, we describe a recent approach that combines the best aspects of both models.L’objet de cet article est de présenter l’approche bayésienne des modèles dynamiques les plus considérés en macroéconomie : les modèles DSGE (Dynamic Stochastic General Equilibrium ) et les modèles VAR. Nous présentons les principaux concepts de l’analyse bayésienne et montrons comment les appliquer dans le cadre des modèles VAR. Nous abordons ensuite les spécificités de l’approche bayésienne des modèles DSGE. Contrairement aux modèles VAR, il n’est plus possible d’obtenir une expression analytique de la distribution a posteriori. Pour pallier cette difficulté il est nécessaire de recourir à des méthodes de Monte-Carlo dont nous décrivons les principales techniques. Enfin, afin de souligner la nature stérile de l'opposition entre ces deux types de modélisation, nous terminons en présentant une approche récente permettant de combiner le meilleur des approches VAR et DSGE.Pelgrin Florian, Adjemian Stéphane. Un regard bayésien sur les modèles dynamiques de la macroéconomie. In: Économie & prévision, n°183-184, 2008-2-3. pp. 127-152