878 Macroeconometric Modeling for Policy
Table 17.1 (continued)
Money market interest rateRt=− 0.27
(0.047)[
Rt− 1 −5.6−1.2
(
πCt− ̄πC
)
−
(
Ut− 2 −U ̄
)
−0.86(
R∗t− 2 −R ̄∗)]+ 0.51
(0.088) 2 R∗t− 0.051
(0.013) 2(
V×P∗
P)t(17.46)OLS, T= 1999 ( 3 )− 2007 ( 2 )=32, σˆ=0.19
FAR( 1 − 3 )(3, 22)=1.62[0.21] FARCH( 1 − 3 )(3, 19)=0.60[0.62]
χNormality^2 ( 2 )=0.82[0.67] FHet(12, 12)=0.59[0.81],whereπCt≡ 100
4 PC,t
PC,t− 4 ;π ̄U=2.5 (the inflation target);U ̄=3.4 (average unemployment
rate);R ̄∗=3.5 (average foreign short-run interest rate).
Note: Standard errors are reported in parentheses below the coefficients. See the appendix to this
chapter for information about the statistics reported below each equation.model version in section 17.4.1. That simplified quantitative transmission mech-
anism is derived from the dynamic econometric model reported in Table 17.1.
We report the estimated macroeconometric relationships in equilibrium-correction
form, with cointegration coefficients imposed as known. The identities that com-
plete the NAM model are not reported. To save space, seasonals and other dummies
are also omitted from the equations in the table. The definitions of the variables
in the equations are given in the appendix to this chapter.
Consider, for example, the analysis conducted in section 17.4.2.1 of an increase
in the interest rateR. The immediate and direct effect is an appreciation of the
krone, measured as an increase in the exchange ratev, defined as krone per unit
foreign exchange. The multiplier is approximated in (17.60) asRvtt≈−0.04, while
the complete equation is reported in (17.36).^13
The decrease invwill affect domestic prices and wage-setting through decreased
import pricespi, as reported in equations (17.37)–(17.39), which gives correspond-
ing approximate partial multipliers aspivtt ≈0.9 andpipt
t
≈0.03 from (17.61)
and (17.62). Hence, at least for a period of time after the interest rate increase, the
exchange rate channelwill provide inflation dampening following an increase in the
interest rate.
The exchange rate channel also affects wages and prices indirectly, through GDP
yand unemploymentu, reported in equations (17.44) and (17.41), respectively. The
mechanisms are as follows. Due to nominal rigidity, the real exchange rate appre-
ciates together with the nominal rate, causing decreased competitiveness, lower
output, and higher unemployment. Together with the interaction with productiv-
ityzin equation (17.40), this constitutes thelabor market channel. For example,
the approximate partial real-wage response from a shock to unemployment is
(w−p)t
ut ≈−0.04 from (17.63).