Hostname: page-component-cb9f654ff-mwwwr Total loading time: 0 Render date: 2025-08-18T19:32:42.792Z Has data issue: false hasContentIssue false
  • English
  • Français

THE SIGNAL EXTRACTION PROBLEM REVISITED: A NOTE ON ITS IMPACT ON A MODEL OF MONETARY POLICY

Published online by Cambridge University Press:  05 November 2009

Benjamin D. Keen
Benjamin D. Keen*
Affiliation:
University of Oklahoma
*
Address correspondence to: Benjamin D. Keen, University of Oklahoma, 329 Hester Hall, 729 Elm Ave., Norman, OK 73019, USA; e-mail: ben.keen@ou.edu.
Get access Rights & Permissions [Opens in a new window]

Abstract

This paper develops a dynamic stochastic general equilibrium (DSGE) model with sticky prices and sticky wages, in which agents have imperfect information on the stance and direction of monetary policy. Agents respond by using Kalman filtering to unravel persistent and temporary monetary policy changes in order to form optimal forecasts of future policy actions. Our results show that a New Keynesian model with imperfect information and real rigidities can account for several key effects of an expansionary monetary policy shock: the hump-shaped increase in output, the delayed and gradual rise in inflation, and the fall in the nominal interest rate.

Keywords

Business CyclesImperfect InformationMonetary PolicyNew Keynesian ModelsSignal Extraction

Information

Type
Notes
Information
Macroeconomic Dynamics , Volume 14 , Issue 3 , June 2010 , pp. 405 - 426
Copyright
Copyright © Cambridge University Press 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

REFERENCES

Adam, Klaus (2005) Learning to forecast and cyclical behavior of output and inflation. Macroeconomic Dynamics 9, 1–27.CrossRefGoogle Scholar
Altig, David, Christiano, Lawrence J., Eichenbaum, Martin, and Linde, Jesper (2005) Firm-Specific Capital, Nominal Rigidities and the Business Cycle. National Bureau of Economic Research Working Paper No. 11034.CrossRefGoogle Scholar
Amano, Robert, Hendry, Scott, and Zhang, Guang-Jia (1999) Financial intermediation, beliefs, and the transmission mechanism. Proceedings of a Conference held by the Bank of Canada, pp. 283–316. Ottawa: Bank of Canada.Google Scholar
Aoki, Kosuke and Kimura, Takeshi (2008) Central Bank's Two-Way Communication with the Public and Inflation Dynamics. Manuscript, Bank of Japan.Google Scholar
Basu, Susanto and Kimball, Miles S. (1997) Cyclical Productivity with Unobserved Input Variation. National Bureau of Economic Research Working Paper No. 5915.CrossRefGoogle Scholar
Bernanke, Ben S. (2004) Inflation targeting. Federal Reserve Bank of St. Louis Review 86, 165–168.Google Scholar
Brunner, Karl, Cukierman, Alex, and Meltzer, Allan (1980) Stagflation, persistent unemployment and the permanence of economic shocks. Journal of Monetary Economics 6, 467–492.CrossRefGoogle Scholar
Burstein, Ariel T. (2006) Inflation and output dynamics with state dependent pricing decisions. Journal of Monetary Economics 53, 1235–1257.CrossRefGoogle Scholar
Calvo, Guillermo A. (1983) Staggered prices in a utility maximizing framework. Journal of Monetary Economics 12, 383–398.CrossRefGoogle Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (1999) Monetary policy shocks: What have we learned and to what end? In Taylor, John and Woodford, Michael (eds.), Handbook of Macroeconomics, Chapter 2. Amsterdam: Elsevier Science Publication.Google Scholar
Christiano, Lawrence J., Eichenbaum, Martin, and Evans, Charles L. (2005) Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113, 1–45.CrossRefGoogle Scholar
Cooley, Thomas F. and Hansen, Gary (1995) Money and the business cycle. In Cooley, Thomas F. (ed.), Chapter 7. Frontiers of Business Cycle Research. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Dellas, Harris (2006) Monetary shocks and inflation dynamics in the New Keynesian model. Journal of Money, Credit, and Banking 38, 543–551.CrossRefGoogle Scholar
Dixit, Avinash and Stiglitz, Joseph (1977) Monopolistic competition and optimum product diversity. American Economic Review 67, 297–308.Google Scholar
Dueker, Michael J. (2000) Are prime rate changes asymmetric? Federal Reserve Bank of St. Louis Review 82, 33–40.Google Scholar
Erceg, Christopher J. (1997) Nominal Wage Rigidities and the Propagation of Monetary Disturbances. Board of Governors of the Federal Reserve System International Finance Discussion Papers No. 590.CrossRefGoogle Scholar
Erceg, Christopher J., Henderson, Dale, and Levin, Andrew T. (2000) Optimal monetary policy with staggered wage and price contracts. Journal of Monetary Economics 46, 281–313.CrossRefGoogle Scholar
Erceg, Christopher J. and Levin, Andrew T. (2003) Imperfect credibility and inflation persistence. Journal of Monetary Economics 50, 915–944.CrossRefGoogle Scholar
Gali, Jordi and Gertler, Mark (1999) Inflation dynamics: A structural econometric analysis. Journal of Monetary Economics 44, 195–222.CrossRefGoogle Scholar
Gavin, William T., Keen, Benjamin D., and Pakko, Michael R. (2009) Inflation risk and optimal monetary policy. Macroeconomic Dynamics 13 Supplement 1, 58–75.CrossRefGoogle Scholar
Gurkaynak, Refet S., Sack, Brian, and Swanson, Eric (2005) The sensitivity of long-run interest rates to economic news: evidence and implications for macroeconomic models. American Economic Review 95, 425–436.CrossRefGoogle Scholar
Hamilton, James D. (1994) Time Series Analysis. Princeton, NJ: Princeton University Press.CrossRefGoogle Scholar
Ireland, Peter (2007) Changes in the Federal Reserve's inflation target: Causes and consequences. Journal of Money, Credit, and Banking 39, 1851–1882.CrossRefGoogle Scholar
Kozicki, Sharon, and Tinsley, P.A. (2005) Permanent and transitory policy shocks in an empirical macro model with asymmetric information. Journal of Economic Dynamics & Control 29, 1985–2015.CrossRefGoogle Scholar
Kydland, Finn E. and Prescott, Edward C. (1982) Time to build and aggregate fluctuations. Econometrica 50, 1345–1370.CrossRefGoogle Scholar
Leeper, Eric M., Sims, Christopher A., and Zha, Tao (1996) What does monetary policy do? Brookings Papers on Economic Activity 2, 1–78.CrossRefGoogle Scholar
Lucas, Robert E. Jr., (1975) An equilibrium model of the business cycle. Journal of Political Economy 83, 1113–1144.CrossRefGoogle Scholar
Mankiw, N. Gregory and Reis, Ricardo (2002) Sticky information versus sticky prices: A proposal to replace the New Keynesian Phillips curve. Quarterly Journal of Economics 117, 1295–1328.CrossRefGoogle Scholar
Mankiw, N. Gregory and Reis, Ricardo (2007) Sticky information in general equilibrium. Journal of the European Economics Association 5, 603–613.CrossRefGoogle Scholar
Orphanides, Athanasiso (2001) Monetary policy rules based on real-time data. American Economic Review 91, 964–985.CrossRefGoogle Scholar
Schorfheide, Frank (2005) Learning and monetary policy shifts. Review of Economic Dynamics 8, 392–419.CrossRefGoogle Scholar
Taylor, John B. (1993) Discretion versus policy rules in practice. Carnegie–Rochester Conference Series on Public Policy 39, 195–214.CrossRefGoogle Scholar
Tsuruga, Takayuki (2007) The hump-shaped behavior of inflation and a dynamic externality. European Economic Review 51, 1107–1125.CrossRefGoogle Scholar
Woodford, Michael (2003) Imperfect common knowledge and the effects of monetary policy. In Aghion, P., Frydman, R., Stiglitz, J., and Woodford, M. (eds.). Knowledge, Information, and Expectations in Modern Macroeconomics: In Honor of Edmund S. Phelps, pp. 25–58. Princeton, NJ: Princeton University Press.Google Scholar