An Unobserved Components Model of the Monetary Transmission Mechanism in a Small Open Economy

Francis Vitek

Macroeconomics from University Library of Munich, Germany

Abstract: This paper develops and estimates an unobserved components model for purposes of monetary policy analysis and inflation targeting in a small open economy. Cyclical components are modeled as a multivariate linear rational expectations model of the monetary transmission mechanism, while trend components are modeled as unobserved components while ensuring the existence of a well defined balanced growth path. Full information maximum likelihood estimation of this unobserved components model, conditional on prior information concerning the values of trend components, provides a quantitative description of the monetary transmission mechanism in a small open economy, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts.

Keywords: Monetary policy analysis; Inflation targeting; Small open economy; Unobserved components model; Indicators of inflationary pressure; Monetary transmission mechanism; Forecast performance evaluation (search for similar items in EconPapers)
JEL-codes: E52 F41 F47 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2005-12-27, Revised 2006-02-06
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
Note: Type of Document - pdf; pages: 44
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Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpma:0512019

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