Gunnar Bårdsen and Ragnar Nymoen 8872007
–1.2–1.0–0.8–0.6–0.4–0.20.00.22008 2009 2010 2011 2012 2007
0.00.20.40.60.81.01.22008 2009 2010 2011 20122007
–3.0–2.5–2.0–1.5–1.0–0.50.02008 2009 2010 2011 20122007
–1.6–1.2–0.8–0.4–0.00.42008 2009 2010 2011 20122007
–6–5–4–3–2–10–2.0 2007 2008 2009 2010 2011 2012–1.6–1.2–0.8–0.40.02008 2009 2010 2011 2012(a) Consumer price inflation (b) Unemployment rateChanges in percentage points
(c) Wage growth(d) Output growth rate (e) Import price inflation (f) Depreciation rateFigure 17.5 Dynamic multipliers from a permanent increase in the money market interest
rate of 100 basis points, 2007(1)–2012(4)
The multipliers are shown as deviations from the baseline simulation in Figure 17.3. The distance between
the two dotted lines represents the 95% confidence intervals.
17.4.2 Shock analysis: dynamic simulations
It seems obvious that a model for policy analysis should be empirically adequate
to a high degree, and that care must be taken not to compromise this property for
other desirable properties. However, in the same way as stability and invariance,
“data fit” is a relative concept. Models that are outperformed in terms of fit might
still be useful for policy analyses because they are highly relevant for the purpose,
as noted by, e.g., Pesaran and Smith (1985). This sub-section will discuss relative
model adequacy – also compared to optimal monetary policy.
17.4.2.1 How strong is the policy instrument?
As a background to policy analysis it is important to obtain a quantitative view
of the transmission mechanisms, specifically to see whether the policy instrument
has a sizeable effect on the variables that are subject to central bank targeting (in
formal or more informal ways). The open version of the model, with exogenous
interest rate (Rt), is then relevant, since among the parameters of the model are
the dynamic multipliers of the endogenous variables with respect to the policy
instrument.
Since the main channel of interest rate transmission is through the exchange rate,
output and the level of unemployment, the interest rate is actually quite effective
in counteracting demand shocks. However, shocks on the supply side, e.g., in
wage-setting (such as permanently increased wage claims), or in foreign inflation,
can be more difficult to curb by anything but huge increases in the interest rate.