Can a Calibrated New-Keynesian Model of Monetary Policy Fit the Facts?

Using an empirical New-Keynesian model with optimal discretionary monetary policy, we calibrate key parameters--the central bank's preference parameters; the degree of forward-looking behavior in the determination of inflation and output; and the variances of inflation and output shocks--to match some broad characteristics of U.S. data. Our preferred parameterizations all imply a small concern for output stability but a large preference for interest rate smoothing, and a small degree of forward-looking behavior in price-setting but a large degree of forward-looking in the determination of output. We provide some intuition for these results and discuss their consequences for practical monetary policy analysis.