Estimating a Markov Switching DSGE Model with Macroeconomic Policy Interaction
March 1, 2019
This paper estimates a Markov switching dynamic stochastic general equilibrium model (MS-DSGE) allowing for changes in monetary/fiscal policy interaction. The key feature of the model is that it seeks to quantitatively examine the impact of changes in monetary/fiscal policy interaction on economic outcomes even during a period when the ZLB is binding and unconventional monetary policy is implemented. To this end, we estimate our model using the shadow interest rate, which can be interpreted as an aggregate that captures the overall effect of unconventional monetary policies as well as conventional monetary policy. Applying our model to Japan, we identify changes in monetary/fiscal policy interaction even during the period when unconventional monetary policy has been implemented. We find that the introduction of Qualitative and Quantitative Easing (QQE) enables the Bank of Japan to actively respond to the inflation rate, which has helped to push up inflation.
E52, E62, C32
Monetary policy; Inflation; Markov-switching DSGE
The authors are grateful to Kosuke Aoki, Andrea Ferrero, Naohisa Hirakata, Hibiki Ichiue, Ryo Jinnai, Takushi Kurozumi, Kevin Lansing, Andrew Levin, Ichiro Muto, Toshitaka Sekine, Shigenori Shiratsuka, Nao Sudo, Tomohiro Sugo, Yosuke Uno, Shingo Watanabe, Fan Dora Xia, and staff members of the Bank of Japan for helpful comments. We also thank Hibiki Ichiue and Yoichi Ueno for providing the data on shadow interest rates. Any remaining errors are the sole responsibility of the authors. The views expressed in this paper are those of the authors and do not necessarily reflect the official views of the Bank of Japan or the International Monetary Fund.
- *1Research and Statistics Department, Bank of Japan (currently at the Personnel and Corporate Affairs Department)
- *2Research and Statistics Department, Bank of Japan
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- *3Research and Statistics Department, Bank of Japan (currently at the Strategy, Policy, and Review Department, International Monetary Fund)
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