Hey folks, i get very strange irf when i ran the following little monetary model. My problem is, when i look at the irf of U (the monetary shock) I would expect that when U rises R (the nominal interest rate) will also rise due to the standard taylor rule (R/Rss = (PI)^(jotaPI)*(Y/Yss)^(jotaY)*U;).…

See [image] Please help see my code Dynare help (legacy posts) Either you have a mistake or you the endogenous variables in your model respond in a way to counteract the initial shock. For example, in the standard New Keynesian model the nominal interest rate can move in e…

so if i understand that right, it is no mistake, that my nominal interest rate drops. But how can that be: “For example, in the standard New Keynesian model the nominal interest rate can move in either direction after a contractionary monetary policy shock. The only thing that is guaranteed is that …

All I am saying is that it could be a feature and not a bug. I did not check your model. The mechanism is the following: Assume the initial monetary policy shock increases the nominal and thus the real interest rate. The central bank then reacts to lower output and inflation endogenously by lowerin…

Okay! I think I understand you. Many thanks for our fast answer!!

[image] jpfeifer: This is one of the reasons why you cannot look at interest rates to determine whether monetary policy is expansionary. If I understand, in the model, after a contractionary monetary policy shock, an increase in the nominal interest rate is not guaranteed but an increase in t…

Yes, frictions in the model and particularly the presence of capital can alter that result.

If I may ask, if we can get a situation where contractionary monetary policy shock causes real interest rate to fall, and inflation and output to increase in an NK DSGE model, then why do people call it a puzzle then since it is a possible equilibrium in the model?

In the simple model it is indeed a puzzle because it could not happen. For more complicated models, see On the mechanics of New-Keynesian models

Dear Prof. Pfeifer, If I may ask, how does the presence of capital alter that result?

The reference above should clarify the answer.

Positive monetary policy shock with nominal interest rate falling?

General DSGE Modeling

jpfeifer 21 May 2013 15:11 2

See