Level-k DSGE and Monetary Policy

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)32_Refereed conference paper (no ISBN/ISSN)peer-review

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Detail(s)

Original languageEnglish
Publication statusPublished - 2 Nov 2018

Conference

TitleMidwest Macroeconomic Meetings (MMM)
LocationVanderbilt University
PlaceUnited States
CityNashville
Period2 - 4 November 2018

Abstract

This paper develops a new framework of level-k DSGE for monetary policy analysis. Incomplete markets are introduced to guarantee the eductive stability of the equilibrium. k=1.334 is estimated using growth and inflation forecasts from the Michigan Survey of Consumers, capturing the missing indirect channels and the weakened direct channels in households’ forecast rules, as well as the wedge between forecasts and realizations. The model produces inflation inertia under Taylor Rule. In pre-Volcker era, more active GDP targeting generates more output mean reversion both in forecasts and in realizations. In Great Recession, the model can explain the missing drop of both inflation and inflation expectations, as well as the stagnant recovery expectations that leads to slow recovery. The model also implies both dampening and accumulation effects of forward guidance. When k goes to infinity, the level-k DSGE reduces to a basic three equation New Keynesian DSGE model as in Gali (2015).

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Information for this record is supplemented by the author(s) concerned.

Citation Format(s)

Level-k DSGE and Monetary Policy. / Qiu, Zhesheng.

2018. Paper presented at Midwest Macroeconomic Meetings (MMM), Nashville, United States.

Research output: Conference Papers (RGC: 31A, 31B, 32, 33)32_Refereed conference paper (no ISBN/ISSN)peer-review