Kiel Working Papers, Kiel Institute for World Economics
No 1366:
Monetary Policy Transmission and the Phillips Curve in a Global Context
Ron Smith and M. Hashem Pesaran
Abstract: The standard derivation of a Phillips curve from a DSGE
model requires that all variables are measured as deviations from their
steady states. But in practice this is not done. The steady state for
output is estimated by some statistical procedure, such as the HP filter,
and the steady state for other variables, including inflation, is treated
as a constant. This is inconsistent with the theory and raises econometric
problems since inflation, for instance, is a very persistent series. We
argue that the natural definition of the steady state is the long-horizon
forecast and estimate these permanent components from a cointegrating VAR
that takes account of global interactions. This estimate of the steady
state will reflect any long-run theoretical relationships embodied in the
cointegrating vectors. We then estimate Phillips Curves and other standard
monetary transmission equations using deviations from the steady states on
US data. This is both consistent with the theory and uses the relevant
economic information about steady states.
Keywords: Global VAR (GVAR), Phillips Curve, Monetary Transmisssion; (follow links to similar papers)
JEL-Codes: C32,; E17,; F37,; F42; (follow links to similar papers)
19 pages, June 2007
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