IDEAS home Printed from https://ideas.repec.org/a/bla/obuest/v66y2004is1p713-733.html
   My bibliography  Save this article

Evaluating New‐Keynesian Models of a Small Open Economy

Author

Listed:
  • Paolo Giordani

Abstract

We suggest a strategy to evaluate members of a class of New‐Keynesian models of a small open economy. As an example, we estimate a modified version of the model in Svensson [Journal of International Economics (2000) Vol. 50, pp. 155–183] and compare its impulse response and variance decomposition functions with those a structural vector autoregression (VAR) model. The focus is on responses to foreign rather than to domestic shocks, which facilitates identification. Some results are that US shocks account for large shares of the variance of Canadian variables, that little of this influence is due to real exchange rate movements, and that Canadian monetary policy is not adequately described by a Taylor rule.

Suggested Citation

  • Paolo Giordani, 2004. "Evaluating New‐Keynesian Models of a Small Open Economy," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 66(s1), pages 713-733, September.
    • Handle: RePEc:bla:obuest:v:66:y:2004:i:s1:p:713-733
    DOI: 10.1111/j.1468-0084.2004.099_1.x
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/j.1468-0084.2004.099_1.x
    Download Restriction: no
    File URL: https://libkey.io/10.1111/j.1468-0084.2004.099_1.x?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Martin Eichenbaum & Charles L. Evans, 1995. "Some Empirical Evidence on the Effects of Shocks to Monetary Policy on Exchange Rates," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 110(4), pages 975-1009.
    2. McCallum, Bennett T & Nelson, Edward, 2000. "Monetary Policy for an Open Economy: An Alternative Framework with Optimizing Agents and Sticky Prices," Oxford Review of Economic Policy, Oxford University Press and Oxford Review of Economic Policy Limited, vol. 16(4), pages 74-91, Winter.
    3. Rudd, Jeremy & Whelan, Karl, 2005. "New tests of the new-Keynesian Phillips curve," Journal of Monetary Economics, Elsevier, vol. 52(6), pages 1167-1181, September.
    4. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1999. "Monetary policy shocks: What have we learned and to what end?," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 2, pages 65-148, Elsevier.
    5. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February.
    6. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    7. Galí, Jordi & Gertler, Mark, 1999. "Inflation Dynamics: A Structural Economic Analysis," CEPR Discussion Papers 2246, C.E.P.R. Discussion Papers.
    8. Giordani, Paolo, 2004. "An alternative explanation of the price puzzle," Journal of Monetary Economics, Elsevier, vol. 51(6), pages 1271-1296, September.
    9. Charles Engel, 2003. "Expenditure Switching and Exchange-Rate Policy," NBER Chapters, in: NBER Macroeconomics Annual 2002, Volume 17, pages 231-300, National Bureau of Economic Research, Inc.
    10. Cushman, David O. & Zha, Tao, 1997. "Identifying monetary policy in a small open economy under flexible exchange rates," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 433-448, August.
    11. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May.
    12. Svensson, Lars E. O., 2000. "Open-economy inflation targeting," Journal of International Economics, Elsevier, vol. 50(1), pages 155-183, February.
    13. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 2005. "Nominal Rigidities and the Dynamic Effects of a Shock to Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 113(1), pages 1-45, February.
    14. Ali Dib, 2011. "Monetary Policy in Estimated Models of Small Open and Closed Economies," Open Economies Review, Springer, vol. 22(5), pages 769-796, November.
    15. Leitemo, Kai & Soderstrom, Ulf, 2005. "Simple monetary policy rules and exchange rate uncertainty," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 481-507, April.
    16. Roberts John M., 2005. "How Well Does the New Keynesian Sticky-Price Model Fit the Data?," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-39, September.
    17. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
    18. Batini, Nicoletta & Harrison, Richard & Millard, Stephen P., 2003. "Monetary policy rules for an open economy," Journal of Economic Dynamics and Control, Elsevier, vol. 27(11-12), pages 2059-2094, September.
    19. Rudebusch, Glenn D., 2002. "Term structure evidence on interest rate smoothing and monetary policy inertia," Journal of Monetary Economics, Elsevier, vol. 49(6), pages 1161-1187, September.
    20. Mardi Dungey & Adrian Pagan, 2000. "A Structural VAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 76(235), pages 321-342, December.
    21. Laxton, Douglas & Pesenti, Paolo, 2003. "Monetary rules for small, open, emerging economies," Journal of Monetary Economics, Elsevier, vol. 50(5), pages 1109-1146, July.
    22. Kim, Soyoung & Roubini, Nouriel, 2000. "Exchange rate anomalies in the industrial countries: A solution with a structural VAR approach," Journal of Monetary Economics, Elsevier, vol. 45(3), pages 561-586, June.
    23. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, in: Monetary Policy Rules, pages 127-156, National Bureau of Economic Research, Inc.
    24. Fabio C. Bagliano & Carlo A. Favero & Francesco Franco, "undated". "Measuring Monetary Policy in Open Economies," Working Papers 133, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
    25. Giordani Paolo, 2003. "On Modeling the Effects of Inflation Shocks: Comments and Some Further Evidence," The B.E. Journal of Macroeconomics, De Gruyter, vol. 3(1), pages 1-15, January.
    26. Kim, Soyoung, 2001. "International transmission of U.S. monetary policy shocks: Evidence from VAR's," Journal of Monetary Economics, Elsevier, vol. 48(2), pages 339-372, October.
    27. Paul R. Bergin, 2017. "Putting the “New Open Economy Macroeconomics” to a Test," World Scientific Book Chapters, in: International Macroeconomic Interdependence, chapter 4, pages 79-115, World Scientific Publishing Co. Pte. Ltd..
    28. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    29. Fair Ray C, 2002. "On Modeling the Effects of Inflation Shocks," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-21, April.
    30. Soderlind, Paul, 1999. "Solution and estimation of RE macromodels with optimal policy," European Economic Review, Elsevier, vol. 43(4-6), pages 813-823, April.
    31. Gali, Jordi & Gertler, Mark, 1999. "Inflation dynamics: A structural econometric analysis," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 195-222, October.
    32. Altug,Sumru & Chadha,Jagjit S. & Nolan,Charles (ed.), 2003. "Dynamic Macroeconomic Analysis," Cambridge Books, Cambridge University Press, number 9780521826686, January.
    33. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach," NBER Working Papers 8604, National Bureau of Economic Research, Inc.
    34. John B. Taylor, 1999. "Monetary Policy Rules," NBER Books, National Bureau of Economic Research, Inc, number tayl99-1, December.
    35. Altug,Sumru & Chadha,Jagjit S. & Nolan,Charles (ed.), 2003. "Dynamic Macroeconomic Analysis," Cambridge Books, Cambridge University Press, number 9780521534031, January.
    36. repec:bla:ecorec:v:76:y:2000:i:235:p:321-42 is not listed on IDEAS
    37. Frank Smets & Raf Wouters, 2003. "An Estimated Dynamic Stochastic General Equilibrium Model of the Euro Area," Journal of the European Economic Association, MIT Press, vol. 1(5), pages 1123-1175, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Melecky, Ales & Melecky, Martin, 2008. "From Inflation to Exchange Rate Targeting: Estimating the Stabilization Effects," MPRA Paper 10844, University Library of Munich, Germany.
    2. Barišić, Patrik & Kovač, Tibor & Arčabić, Vladimir, 2023. "More than just supply and demand: Macroeconomic shock decomposition in Croatia during and after the transition period," Structural Change and Economic Dynamics, Elsevier, vol. 67(C), pages 420-438.
    3. Martin Melecky & Evgenij Najdov, 2010. "Comparing constraints to economic stabilization in Macedonia and Slovakia: macroestimates with micronarratives," Applied Financial Economics, Taylor & Francis Journals, vol. 20(9), pages 681-699.
    4. Mustafa Kilinc & Cengiz Tunc, 2014. "Identification of Monetary Policy Shocks in Turkey: A Structural VAR Approach," Working Papers 1423, Research and Monetary Policy Department, Central Bank of the Republic of Turkey.
    5. Melecky, Martin, 2012. "Macroeconomic dynamics in Macedonia and Slovakia: Structural estimation and comparison," Economic Modelling, Elsevier, vol. 29(4), pages 1377-1387.
    6. Bas Aarle & Harry Garretsen & Cindy Moons, 2008. "Accession to the euro-area: a stylized analysis using a NK model," International Economics and Economic Policy, Springer, vol. 5(1), pages 5-24, July.
    7. Horvath Roman & Rusnak Marek, 2009. "How Important Are Foreign Shocks in a Small Open Economy? The Case of Slovakia," Global Economy Journal, De Gruyter, vol. 9(1), pages 1-17, March.
    8. Daniel Buncic & Martin Melecky, 2008. "An Estimated New Keynesian Policy Model for Australia," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 1-16, March.
    9. Jovanovic, Branimir & Petreski, Marjan, 2012. "Monetary policy in a small open economy with fixed exchange rate: The case of Macedonia," Economic Systems, Elsevier, vol. 36(4), pages 594-608.
    10. Moons, Cindy & Garretsen, Harry & van Aarle, Bas & Fornero, Jorge, 2007. "Monetary policy in the New-Keynesian model: An application to the Euro Area," Journal of Policy Modeling, Elsevier, vol. 29(6), pages 879-902.
    11. Martin Melecky, 2008. "A Structural Investigation of Third‐Currency Shocks to Bilateral Exchange Rates," International Finance, Wiley Blackwell, vol. 11(1), pages 19-48, May.
    12. Bank for International Settlements, 2016. "Inflation mechanisms, expectations and monetary policy," BIS Papers, Bank for International Settlements, number 89, October –.
    13. Heidari, Hassan, 2010. "An Estimated Small Open Economy New-Keynesian Model of the Australian Economy," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(4), pages 7-15, December.
    14. Tae-Seok Jang & Eiji Okano, 2015. "Productivity Shocks and Monetary Policy in a Two-Country Model," Frontiers of Economics in China-Selected Publications from Chinese Universities, Higher Education Press, vol. 10(1), pages 7-37, March.
    15. Cengiz TUNC & Mustafa Kilinc, 2018. "Exchange Rate Pass‐Through In A Small Open Economy: A Structural Var Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 70(4), pages 410-422, October.
    16. Bojaj, Martin M. & Muhadinovic, Milica & Bracanovic, Andrej & Mihailovic, Andrej & Radulovic, Mladen & Jolicic, Ivan & Milosevic, Igor & Milacic, Veselin, 2022. "Forecasting macroeconomic effects of stablecoin adoption: A Bayesian approach," Economic Modelling, Elsevier, vol. 109(C).
    17. Lindé, Jesper, 2003. "Monetary Policy Shocks and Business Cycle Fluctuations in a Small Open Economy: Sweden 1986-2002," Working Paper Series 153, Sveriges Riksbank (Central Bank of Sweden).
    18. Mustafa Kılınç & Cengiz Tunç & Mehmet Yörükoğlu, 2016. "Twin stability problem: joint issue of high current account deficit and high inflation," BIS Papers chapters, in: Bank for International Settlements (ed.), Inflation mechanisms, expectations and monetary policy, volume 89, pages 361-371, Bank for International Settlements.
    19. Melecky, Ales & Melecky, Martin, 2010. "From inflation to exchange rate targeting: Estimating the stabilization effects for a small open economy," Economic Systems, Elsevier, vol. 34(4), pages 450-468, December.
    20. Juselius, Mikael, 2008. "Testing the New Keynesian Model on U.S. and Euro Area Data," Economics - The Open-Access, Open-Assessment E-Journal (2007-2020), Kiel Institute for the World Economy (IfW Kiel), vol. 2, pages 1-26.
    21. Borek Vasicek, 2010. "Monetary Policy Rules and Inflation Processes in Open Emerging Economies," Eastern European Economics, Taylor & Francis Journals, vol. 48(4), pages 36-58, January.
    22. Mardi Dungey & Adrian Pagan, 2009. "Extending a SVAR Model of the Australian Economy," The Economic Record, The Economic Society of Australia, vol. 85(268), pages 1-20, March.
    23. Gordana Djurovic & Vasilije Djurovic & Martin M. Bojaj, 2020. "The macroeconomic effects of COVID-19 in Montenegro: a Bayesian VARX approach," Financial Innovation, Springer;Southwestern University of Finance and Economics, vol. 6(1), pages 1-16, December.
    24. Fousseni Chabi-Yo & Jun Yang, 2007. "A No-Arbitrage Analysis of Macroeconomic Determinants of Term Structures and the Exchange Rate," Staff Working Papers 07-21, Bank of Canada.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Daniel Buncic & Martin Melecky, 2008. "An Estimated New Keynesian Policy Model for Australia," The Economic Record, The Economic Society of Australia, vol. 84(264), pages 1-16, March.
    2. Thorvardur Tjörvi Ólafsson, 2006. "The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy," Economics wp31_tjorvi, Department of Economics, Central bank of Iceland.
    3. Michael Paetz, 2007. "Robust Control and Persistence in the New Keynesian Economy," Quantitative Macroeconomics Working Papers 20711, Hamburg University, Department of Economics.
    4. Eyal Argov & David Elkayam, 2010. "An Estimated New Keynesian Model for Israel," Israel Economic Review, Bank of Israel, vol. 7(2), pages 1-40.
    5. Smets, Frank & Wouters, Raf, 2002. "Openness, imperfect exchange rate pass-through and monetary policy," Journal of Monetary Economics, Elsevier, vol. 49(5), pages 947-981, July.
    6. Ulf Söderström & Paul Söderlind & Anders Vredin, 2005. "New‐Keynesian Models and Monetary Policy: A Re‐examination of the Stylized Facts," Scandinavian Journal of Economics, Wiley Blackwell, vol. 107(3), pages 521-546, September.
    7. Leitemo, Kai & Soderstrom, Ulf, 2005. "Simple monetary policy rules and exchange rate uncertainty," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 481-507, April.
    8. Deming Luo & Stephen Ferris, 2008. "Optimal Simple Monetary Policy Rules in a Small Open Economy with Exchange Rate Imperfections," Carleton Economic Papers 08-03, Carleton University, Department of Economics.
    9. Hilde C. Bjørnland, 2005. "Monetary policy and the illusionary exchange rate puzzle," Working Paper 2005/11, Norges Bank.
    10. Alfred Guender & Yu Xie, 2007. "Is there an exchange rate channel in the forward-looking Phillips curve? A theoretical and empirical investigation," New Zealand Economic Papers, Taylor & Francis Journals, vol. 41(1), pages 5-28.
    11. Argov, Eyal & Binyamini, Alon & Elkayam, David & Rozenshtrom, Irit, 2007. "A Small Macroeconomic Model to Support Inflation Targeting in Israel," MPRA Paper 4784, University Library of Munich, Germany.
    12. Efrem Castelnuovo, 2002. "Squeezing the Interest Rate Smoothing Weight with a Hybrid Expectations Model," Macroeconomics 0211006, University Library of Munich, Germany.
    13. Amit Kara & Edward Nelson, 2003. "The Exchange Rate and Inflation in the UK," Scottish Journal of Political Economy, Scottish Economic Society, vol. 50(5), pages 585-608, November.
    14. Wollmershauser, Timo, 2006. "Should central banks react to exchange rate movements? An analysis of the robustness of simple policy rules under exchange rate uncertainty," Journal of Macroeconomics, Elsevier, vol. 28(3), pages 493-519, September.
    15. Jordi Galí & Tommaso Monacelli, 2005. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 72(3), pages 707-734.
    16. Marika Karanassou & Hector Sala & Dennis J. Snower, 2010. "Phillips Curves And Unemployment Dynamics: A Critique And A Holistic Perspective," Journal of Economic Surveys, Wiley Blackwell, vol. 24(1), pages 1-51, February.
    17. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
    18. Carlos Garcia & Wildo Gonzalez, 2014. "Why does monetary policy respond to the real exchange rate in small open economies? A Bayesian perspective," Empirical Economics, Springer, vol. 46(3), pages 789-825, May.
    19. Bjørnland, Hilde C., 2009. "Monetary policy and exchange rate overshooting: Dornbusch was right after all," Journal of International Economics, Elsevier, vol. 79(1), pages 64-77, September.
    20. Alejandro Justiniano & Bruce Preston, 2010. "Monetary policy and uncertainty in an empirical small open-economy model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(1), pages 93-128.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:obuest:v:66:y:2004:i:s1:p:713-733. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/sfeixuk.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.