A Keynesian Based Econometric Framework for Studying Monetary Policy Rules

In the framework of a Keynesian based monetary macromodel we study the implications of alternative monetary policy rules. Our monetary macromodel exhibits the following features: asset market clearing, disequilibrium in the product and labor markets, sluggish price and quantity adjustments, two Phillips curves for the wage and price dynamics and expectations formulation which represents a combination of adaptive and forward looking behavior. Two alternative monetary policy rules for controlling inflation are considered: the monetary authority (1) targeting monetary aggregates or (2) targeting the interest rate. For those two policy rules the model's dynamic features are explored given certain parameter constellations. Then the key parameters of the model variants are estimated through GMM and single equation estimations employing US time series data 1960.1-1995.1. Stochastic simulations are performed and contrasted with US macroeconomic data in terms of standard deviations of macro variables as well as their cross-correlation to output. The model can be viewed as an alternative to equilibrium macromodels in fitting macroeconomic data. With respect to out two monetary regimes it seems that in terms of volatility the model variant with the second policy rule gives a better fit whereas for cross-correlation with output the variant with the first policy rule performs better.