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| Research Update |
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| New Titles in the Staff
Reports Series |
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| Number 1, 2008 |
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| Macroeconomics and Growth |
| No. 313, January 2008 |
| Monetary Policy Implementation Frameworks: A Comparative Analysis |
| Antoine Martin and Cyril Monnet |
| Martin and Monnet compare two stylized frameworks for the implementation of monetary policy. The first framework relies only on standing facilities, and the second one relies only on open market operations. They show that the Friedman rule cannot be implemented in the first framework, but can be implemented using the second framework. However, for a given rate of inflation, they show that the first framework unambiguously achieves higher welfare than the second one. The authors conclude that an optimal system of monetary policy implementation should contain elements of both frameworks. Their results also suggest that any such system should pay interest on both required and excess reserves. |
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| No. 320, March 2008 |
| Forming Priors for DSGE Models (and How It Affects the Assessment of Nominal Rigidities) |
| Marco Del Negro and Frank Schorfheide |
| This paper discusses prior elicitation for the parameters of dynamic stochastic general equilibrium (DSGE) models and provides a method for constructing prior distributions for a subset of these parameters from beliefs about the moments of the endogenous variables. The empirical application studies the role of price and wage rigidities in a New Keynesian DSGE model and finds that standard macro time series cannot discriminate among theories that differ in the quantitative importance of nominal frictions. |
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| No. 321, March 2008 |
| Monetary Policy Analysis with Potentially Misspecified Models |
| Marco Del Negro and Frank Schorfheide |
| Policy analysis with potentially misspecified dynamic stochastic general equilibrium (DSGE) models faces two challenges: estimation of parameters that are relevant for policy trade-offs, and treatment of estimated deviations from the cross-equation restrictions. This paper develops and explores policy analysis approaches that are based on either the generalized shock structure for the DSGE model or the explicit modeling of deviations from cross-equation restrictions. Using post-1982 U.S. data, the authors first quantify the degree of misspecification in a state-of-the-art DSGE model and then document the performance of different interest rate feedback rules. They find that many of the policy prescriptions derived from the benchmark DSGE model are robust to the various treatments of misspecifications considered in this paper, but that quantitatively the cost of deviating from such prescriptions varies substantially. |
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| No. 322, March 2008 |
| Investment Shocks and Business Cycles |
| Alejandro Justiniano, Giorgio E. Primiceri, and Andrea Tambalotti |
| Shocks to the marginal efficiency of investment are the most important drivers of business cycle fluctuations in U.S. output and hours. Moreover, like a textbook demand shock, these disturbances drive prices higher in expansions. The authors reach these conclusions by estimating a dynamic stochastic general equilibrium (DSGE) model with several shocks and frictions. They also find that neutral technology shocks are not negligible, but their share in the variance of output is only around 25 percent and even lower for hours. Labor supply shocks explain a large fraction of the variation of hours at very low frequencies, but not over the business cycle. Finally, the study shows that imperfect competition and, to a lesser extent, technological frictions are key to the transmission of investment shocks in the model. |
