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MONETARY POLICY AND SUNSPOT FLUCTUATIONS IN THE UNITED STATES AND THE EURO AREA

Published online by Cambridge University Press:  25 May 2012

Yasuo Hirose
Yasuo Hirose*
Affiliation:
Keio University
*
Address correspondence to: Yasuo Hirose, 2-15-45 Mita, Minato-ku, Tokyo 108-8345, Japan; e-mail: yhirose@econ.keio.ac.jp.
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Abstract

We estimate a two-country open economy version of the New Keynesian dynamic stochastic general equilibrium model for the United States and the Euro area, using Bayesian techniques that allow for both determinacy and indeterminacy of the equilibrium. Empirical analysis shows that the worldwide equilibrium is indeterminate due to a passive monetary policy in the Euro area, even if U.S. policy is aggressive enough. We demonstrate that the impulse responses under indeterminacy exhibit dynamics different from those under determinacy and that sunspot shocks affect the Euro economy to a substantial degree, whereas the transmission of sunspots to the United States is limited.

Keywords

Monetary PolicyIndeterminacySunspot ShockOpen Economy ModelBayesian Analysis
Type
Articles
Information
Macroeconomic Dynamics , Volume 17 , Issue 1 , January 2013 , pp. 1 - 28
Copyright
Copyright © Cambridge University Press 2012

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