Stabilization and expectations in a state space model of interconnected economies, a dynamic panel study

Arbeitspapier

Carlin and Soskice (2005) advocate a 3-equation model of stabilization policy, the IS-PC-MR model. Their third equation is the monetary reaction rule MR derived by assuming that governments have performance objectives, but are constrained by an augmented Phillips curve PC. Central banks achieve their preferred outcome by setting interest rates along an IS curve. We simplify their model to 2 equations (PC and MR), developing a state space econometric specification of this solution, and adding a random walk model of unobserved potential growth. Applying this model to a panel of North Atlantic countries, we find it historically consistent with an inflation target of about 4%. Significant interdependence is found in the between-country covariance of inflation and growth shocks, but not of potential output. Beginning with the approximation that expected inflation is the most recent observation, we extend the model to introduce alternative assumptions about expectations with mixed results, support for the stickyprice model, but doubts about activist policy.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 2011-15

Classification and Topics

• Classification: Wirtschaft ; Policy Objectives; Policy Designs and Consistency; Policy Coordination ; Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
• Subject: new Keynesian policy ; inflation targets ; expectations

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Kiefer, David
• Event: Veröffentlichung
• (who): The University of Utah, Department of Economics
• (where): Salt Lake City, UT
• (when): 2011

Further information

• Handle: http://hdl.handle.net/10419/64475
• Last update: 10.03.2025, 11:45 AM CET