Optimal Monetary Policy in an Operational Medium-Sized DSGE Model
Sveriges Riksbank and CEPR
Lars E.O. Svensson
CEPR, and NBER
Money, Credit and Banking 43 (2011) 1287-1331.
First version: June 2006
This version: July 2010
We show how to construct optimal policy projections in Ramses, the Riksbank’s open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports our view that the model parameters may be regarded as unaffected by the monetary policy specification. We discuss how monetary policy, and in particular the choice of output gap measure, affects the transmission of shocks. Finally, we use the model to assess the recent Great Recession in the world economy and how its impact on the economic development in Sweden depends on the conduct of monetary policy. This provides an illustration on how Rames incoporates large international spillover effects.
JEL Classification: E52, E58
Keywords: Optimal monetary policy, instrument rules, optimal policy projections,
open-economy DSGE models