A Comparison Analysis of Monetary Policy Effect Under an Open Economy Model

Keun Yeong Lee ()
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Keun Yeong Lee: Sungkyunkwan University

East Asian Economic Review, 2018, vol. 22, issue 2, 141-176

Abstract: The paper analyzes and compares the effects of domestic monetary policy using DSGE, DSGE-VAR, and VAR based on a two-country open economy model of Korea and the U.S. According to impulse response analysis, a domestic interest rate hike raises won value in the case of DSGE and DSGE-VAR models, while in the case of the unrestricted VAR model, it lowers won value. In the marginal data density standard, DSGE-VAR (μ=1) is superior to DSGE or Bayesian VAR over the sample period. Conversely, in the in-sample RMSE criterion, especially for the won/dollar exchange rate, VARs are superior to DSGE or DSGE-VAR. It is necessary to study further if these differences are caused by model misspecification or omitted variable bias.

Keywords: DSGE; DSGE-VAR; Bayesian VAR; Marginal Data Density; RMSE (search for similar items in EconPapers)
JEL-codes: E10 E50 F30 F40 (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:ris:eaerev:0341

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