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THE SIGNAL EXTRACTION PROBLEM REVISITED: A NOTE ON ITS IMPACT ON A MODEL OF MONETARY POLICY

Published online by Cambridge University Press:  05 November 2009

Benjamin D. Keen
Benjamin D. Keen*
Affiliation:
University of Oklahoma
*
Address correspondence to: Benjamin D. Keen, University of Oklahoma, 329 Hester Hall, 729 Elm Ave., Norman, OK 73019, USA; e-mail: ben.keen@ou.edu.
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Abstract

This paper develops a dynamic stochastic general equilibrium (DSGE) model with sticky prices and sticky wages, in which agents have imperfect information on the stance and direction of monetary policy. Agents respond by using Kalman filtering to unravel persistent and temporary monetary policy changes in order to form optimal forecasts of future policy actions. Our results show that a New Keynesian model with imperfect information and real rigidities can account for several key effects of an expansionary monetary policy shock: the hump-shaped increase in output, the delayed and gradual rise in inflation, and the fall in the nominal interest rate.

Keywords

Business CyclesImperfect InformationMonetary PolicyNew Keynesian ModelsSignal Extraction
Type
Notes
Information
Macroeconomic Dynamics , Volume 14 , Issue 3 , June 2010 , pp. 405 - 426
Copyright
Copyright © Cambridge University Press 2009

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