Evaluating An Estimated New Keynesian Small Open Economy Model

Jesper Lindé, Malin Adolfson (), Stefan Laséen () and Mattias Villani

No 6027, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper estimates and tests a new Keynesian small open economy model in the tradition of Christiano, Eichenbaum, and Evans (2005) and Smets and Wouters (2003) using Bayesian estimation techniques on Swedish data. To account for the switch to an inflation targeting regime in 1993 we allow for a discrete break in the central bank's instrument rule. A key equation in the model - the uncovered interest rate parity (UIP) condition - is well known to be rejected empirically. Therefore we explore the consequences of modifying the UIP condition to allow for a negative correlation between the risk premium and the expected change in the nominal exchange rate. The results show that the modification increases the persistence and volatility in the real exchange rate and that this model has an empirical advantage compared with the standard UIP specification.

Keywords: Bayesian inference; Dsge model; Dsge-var model; Dsge-vecm model; Open economy (search for similar items in EconPapers)
JEL-codes: C11 C53 E17 (search for similar items in EconPapers)
Date: 2007-01
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (23)

Downloads: (external link)
https://cepr.org/publications/DP6027 (application/pdf)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at subscribers@cepr.org

Related works:
Journal Article: Evaluating an estimated new Keynesian small open economy model (2008)
Working Paper: Evaluating An Estimated New Keynesian Small Open Economy Model (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:6027

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP6027

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().