Practical Model-Based Monetary Policy Analysis: A How-To Guide

ByDouglas Laxton, Andrew Berg, Philippe D Karam

March 1, 2006

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper provides a how-to guide to model-based forecasting and monetary policy analysis. It describes a simple structural model, along the lines of those in use in a number of central banks. This workhorse model consists of an aggregate demand (or IS) curve, a price-setting (or Phillips) curve, a version of the uncovered interest parity condition, and a monetary policy reaction function. The paper discusses how to parameterize the model and use it for forecasting and policy analysis, illustrating with an application to Canada. It also introduces a set of useful software tools for conducting a model-consistent forecast.

Subject: Exchange rates, Foreign exchange, Inflation, Oil prices, Output gap, Prices, Production, Real exchange rates

Keywords: computational techniques, demand shock, excess demand, Exchange rates, expectations effect, Forecasting and Simulation, forward-looking inflation term, Global, headline inflation, Inflation, inflation equation, inflation rate, inflation target path, Model construction and estimation, Monetary Policy, Oil prices, Output gap, output gap equation, path Canada, reaction function, Real exchange rates, transmission mechanism, WP

Pages:
69
Volume:
2006
DOI:
https://doi.org/10.5089/9781451863413.001
Issue:
081
Series:
Working Paper No. 2006/081
Stock No:
WPIEA2006081
ISBN:
9781451863413
ISSN:
1018-5941

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