Monetary policy and sunspot fluctuations in the United States and the Euro area

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Abstract

We estimate a two-country open economy version of the New Keynesian dynamic stochastic general equilibrium model for the United States and the Euro area, using Bayesian techniques that allow for both determinacy and indeterminacy of the equilibrium. Empirical analysis shows that the worldwide equilibrium is indeterminate due to a passive monetary policy in the Euro area, even if U.S. policy is aggressive enough. We demonstrate that the impulse responses under indeterminacy exhibit dynamics different from those under determinacy and that sunspot shocks affect the Euro economy to a substantial degree, whereas the transmission of sunspots to the United States is limited.

Original languageEnglish
Pages (from-to)1-28
Number of pages28
JournalMacroeconomic Dynamics
Volume17
Issue number1
DOIs
Publication statusPublished - 2013 Jan 1

Keywords

  • Bayesian Analysis
  • Indeterminacy
  • Monetary Policy
  • Open Economy Model
  • Sunspot Shock

ASJC Scopus subject areas

  • Economics and Econometrics

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