Monetary Policy Trade-Offs in an Estimated Open-Economy DSGE Model – Abstract


Malin Adolfson,
Sveriges Riksbank

Stefan Laséen,
Sveriges Riksbank

Jesper Lindé,
Federal Reserve Board and CEPR

Lars E.O. Svensson
Stockholm School of Economics; IIES, Stockholm University; CEPR; and NBER

Journal of Economic Dynamics and Control 42 (2014) 33-49

First version: October 2007
This version: February 2014

This paper studies the trade-offs between stabilizing CPI inflation and alternative measures of the output gap in Ramses, the Riksbank’s estimated dynamic stochastic general equilibrium (DSGE) model of a small open economy. Our main finding is that the trade-off between stabi- lizing CPI inflation and the output gap strongly depends on which concept of potential output in the output gap between output and potential output is used in the loss function. If potential output is defined as a smooth trend this trade-off is much more pronounced compared to the case when potential output is defined as the output level that would prevail if prices and wages were flexible.

JEL Classification: E52, E58

Keywords: Optimal monetary policy, instrument rules, open-economy DSGE models, propagation of shocks, impulse responses, output gap, potential output