Evaluating An Estimated New Keynesian Small Open Economy Model

Malin Adolfson (), Stefan Laséen (), Jesper Lindé 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)
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
Date: 2007-01
View list of references View citations in EconPapers

Downloads: (external link)
http://www.cepr.org/pubs/dps/DP6027.asp (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:
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.

Ordering information: This working paper can be ordered from
http://www.cepr.org/pubs/dps/DP6027.asp

Access Statistics for this paper

More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers
Address: Centre for Economic Policy Research, 53--56 Great Sutton Street, London EC1V 0DG
Series data maintained by ().