|2. Estimates of the Effectiveness of Monetary Policy|
|The title of this chapter is the same as the title of a paper that
can be read or downloaded from this site:
Estimates of the Effectiveness of Monetary Policy.
You should read this paper
before reading this chapter. The paper uses the MC3 model to
analyze monetary policy effects. The effects of a tax rate rule are
also analyzed. Although the stochastic simulation results in the paper
cannot be duplicated on
this site, the multiplier experiment in Table 1 in the paper can be.
The following are the steps
necessary to duplicate this experiment, which is a
decrease in RS of one percentage point.
Once the model is solved you can examine the results. If you have done the experiment correctly, your comparisons (between your dataset and MC3BASE) will match the comparisons in the paper, subject to slight rounding error. You can, of course, examine many more variables and periods than are presented in the paper. Remember that the flow variables are presented in the output at annual rates. In Table 1 in the paper the results for nominal after tax profits, PIEF-TFG-TFS+PX*PIEB-TBG-TBS, and capital gains, CG, are presented at quarterly rates. This experiment is useful for seeing the effects of monetary policy in the model.
The use of the historical errors is important. This allows the perfect tracking solution to be the base path, from which changes can then be made. If you did not use the historical errors, you would have to first create a base path of predicted values, which the new predicted path (after the interest rate changes) would be compared. See Section 2.6 of The US Model Workbook for more discussion of this.
The estimates in Table 2 in the paper are simply the estimates of US equation 30, the interest rate reaction function of the Fed.