Chair of Innovation, Competition Policy and New Institutional Economics

2014-02

Number
2014-02
Authors
Stephen Sacht
Title
Analysis of Various Shocks within the High-Frequency Versions of the Baseline New-Keynesian Model
Abstract In this paper we analyze a hybrid small-scale New-Keynesian model with an arbitrary frequency of the agents’ synchronized decision making. We study the impact of various demand and supply shocks on the dynamics of the model variables. We show that the corresponding impulse-response functions of high-frequency versions of the model can qualitatively as well as quantitatively be fairly dissimilar from their quarterly counterparts. This can be explained by the decrease in the effectiveness of monetary policy responses to these shocks and the overall increase of inertia in the model variables. In particular, different kinds of frequency-dependent persistence effects occur, which dampen the pass-through of output gap movements into inflation rate dynamics as the period length decreases. The main conclusion is that DSGE modelling may be more sensitive to its choice of the agents’ decision interval.

Keywords: Hybrid New-Keynesian model, high-frequency modelling, monetary policy, frequency-dependent persistence

JEL classification: C63, C68, E32, E52
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