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Nominal Frictions and Optimal Monetary Policy

Author

Listed:
  • Adnan Haider

    (Pakistan Institute of Development Economics, Islamabad, Pakistan)

  • Drissi Ramzi

    (CERESG, ESG Business School, France)

Abstract

It is well known in standard economic literature that nominal frictions have significant impact on the transmission mechanism of monetary policy. This paper considers a closed economy version of DSGE model with various nominal frictions vis-à-vis monetary-cumfiscal blocks to seek the basic query that how monetary policy impacts while in the presence of nominal frictions, like price stickiness, staggered wages, etc. Using Bayesian Simulation techniques, we estimate the model for the closed economy . Our simulation results show that despite the apparent similarities of various frictions, their responses to shocks and fit to data are quite different and there is no agreement on their relative performance. As a result, Monetary Authorities cannot afford to rely on a single reference model which contains few nominal frictions of the economy but need to model a large number of alternative ways available when they take their decision of optimal monetary policy.

Suggested Citation

  • Adnan Haider & Drissi Ramzi, 2009. "Nominal Frictions and Optimal Monetary Policy," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 48(4), pages 525-551.
    • Handle: RePEc:pid:journl:v:48:y:2009:i:4:p:525-551
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    File URL: http://www.pide.org.pk/pdf/PDR/2009/Volume4/525-551.pdf
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    Citations

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    Cited by:

    1. Ramzi Drissi, 2014. "Robust Monetary Policy in An Uncertain Economic Environment: Evidence from Tunisian Economy," Asian Economic and Financial Review, Asian Economic and Social Society, vol. 4(7), pages 969-986, July.
    2. Yazmín V. Soriano-Morales & Francisco Venegas-Martínez & Benjamín Vallejo-Jiménez, 2015. "Determination of the equilibrium expansion rate of money when money supply is driven by a time-homogeneous Markov modulated jump diffusion process," Economics Bulletin, AccessEcon, vol. 35(4), pages 2074-2084.

    More about this item

    Keywords

    DSGE Models; Nominal Trictions; Monetary Policy;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications

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