Optimal Monetary Policy in an Estimated Local Currency Pricing Model
DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments
ISBN: 978-1-78190-305-6, eISBN: 978-1-78190-306-3
Publication date: 22 November 2012
Abstract
We analyze fluctuations in inflation and the nominal exchange rate under optimal monetary policy with local currency pricing by developing two-country DSGE local currency pricing and producer currency pricing models. We estimate our models using Bayesian techniques with Japanese and US data, and calculate impulse response functions. Our estimation results show that local currency pricing is strongly supported against producer currency pricing. From the estimated parameters, we show that completely stabilizing consumer price index inflation is optimal from the viewpoint of minimizing welfare costs and that completely stabilizing consumer price index inflation is consistent with completely stabilizing the nominal exchange rate.
Keywords
Citation
Okano, E., Eguchi, M., Gunji, H. and Miyazaki, T. (2012), "Optimal Monetary Policy in an Estimated Local Currency Pricing Model", Balke, N., Canova, F., Milani, F. and Wynne, M.A. (Ed.) DSGE Models in Macroeconomics: Estimation, Evaluation, and New Developments (Advances in Econometrics, Vol. 28), Emerald Group Publishing Limited, Leeds, pp. 39-79. https://doi.org/10.1108/S0731-9053(2012)0000028005
Publisher
:Emerald Group Publishing Limited
Copyright © 2012, Emerald Group Publishing Limited