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Evaluating New‐Keynesian Models of a Small Open Economy *
Author(s) -
Giordani Paolo
Publication year - 2004
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/j.1468-0084.2004.099_1.x
Subject(s) - economics , new keynesian economics , vector autoregression , small open economy , variance decomposition of forecast errors , impulse response , structural vector autoregression , open economy , monetary policy , exchange rate , econometrics , variance (accounting) , keynesian economics , taylor rule , exchange rate pass through , macroeconomics , central bank , mathematics , mathematical analysis , accounting
We suggest a strategy to evaluate members of a class of New‐Keynesian models of a small open economy. As an example, we estimate a modified version of the model in Svensson [ Journal of International Economics (2000) Vol. 50, pp. 155–183] and compare its impulse response and variance decomposition functions with those a structural vector autoregression (VAR) model. The focus is on responses to foreign rather than to domestic shocks, which facilitates identification. Some results are that US shocks account for large shares of the variance of Canadian variables, that little of this influence is due to real exchange rate movements, and that Canadian monetary policy is not adequately described by a Taylor rule.