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Estimating a Markov Switching DSGE Model with Macroeconomic Policy Interaction

Nobuhiro Abe, Takuji Fueki and Sohei Kaihatsu
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Nobuhiro Abe: Bank of Japan
Takuji Fueki: Bank of Japan

No 19-E-3, Bank of Japan Working Paper Series from Bank of Japan

Abstract: This paper estimates a Markov switching dynamic stochastic general equilibrium model (MS-DSGE) allowing for changes in monetary/fiscal policy interaction. The key feature of the model is that it seeks to quantitatively examine the impact of changes in monetary/fiscal policy interaction on economic outcomes even during a period when the ZLB is binding and unconventional monetary policy is implemented. To this end, we estimate our model using the shadow interest rate, which can be interpreted as an aggregate that captures the overall effect of unconventional monetary policies as well as conventional monetary policy. Applying our model to Japan, we identify changes in monetary/fiscal policy interaction even during the period when unconventional monetary policy has been implemented. We find that the introduction of Qualitative and Quantitative Easing (QQE) enables the Bank of Japan to actively respond to the inflation rate, which has helped to push up inflation.

Keywords: Monetary policy; Inflation; Markov-switching DSGE (search for similar items in EconPapers)
JEL-codes: E52 E62 C32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
Date: 2019-03-01
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