Problems with monetary shock, sw'03

[MarcoUrbani]

Hi everybody,
I have a problem with IRF’s to monetary shock (ETA_R) in the Viegi code for SW’03, which I have found in another topic of this forum. You find attacched the code.
In particular, I can’t get why inflation and interest rate respond the samy way to a positive monetary shock; shouldn’t be the case that a positive monetary shock rise interest rate through the taylor equation, and decreases inflation, along side with output and other real variables? With a positive ETA_R, inflation and interest rate move in the same direction. in the code.
Thank everybody for the support
SMETS_WOUTERS.mod (3.7 KB)

[jpfeifer]

Maybe

Weird behavior Taylor Rule

Structural shocks that affect the economy will always affect both inflation and output. Your interpretation relies on an intuition where you exogenously vary GDP, keeping everything constant. But this does not happen as inflation will move and this equilibrium behavior will take the Taylor rule into account. Take a positive TFP shock. It will increase output and decrease inflation. Depending on the strength of the responses and the respective weights in the Taylor rule, the nominal interest rate…

is relevant.

[MarcoUrbani]

Yes, as far as I understood, is it a matter of non-linearities? Basically, I exogenously vary interest rate and this have a counter-intuitive behavior; is it a matter of feedbacks in the equations of the model, strenght of parameters ecc?
SW’03 have these IRF’s that are consistent with a IS-LM simplified framework, so positive monetary shock(ie. an increase in the interest rate) make their inflation go down and economic activity contract as well, and I think this is consistent with the common sense and even VAR-based IRFs. Is it possible to have the correct code and such a weird behavior.
Thanks for the support

[jpfeifer]

I did not check the code. But if your results are inconsistent with the original paper, then most likely there is a mistake in the code.