Which other known structural parameters make monetary policy less effective?

General DSGE Modeling
1

May I ask? Are there other known parameters that determine the effectiveness of monetary policy in a DSGE model besides the Calvo parameter?

Here is my little issue. I estimate a VAR monetary policy model for my country. In the results, a monetary policy shock is not statistically significant in the IRFs. Other papers find the same. So the question is, why is monetary policy weak? I estimate a DSGE model, and the estimated Calvo parameter is about 0.15. Thus, prices change about every quarter. The model is a quarterly model. So monetary policy is also kinda weak in the estimated DSGE model. Moreover, there is one micro paper for my country that finds that the frequency of price change is even faster…about one month (using some other methodology). So the story here is kinda consistent in the VAR, DSGE, and that micro paper…and even in real life:). When there is an inflation shock, prices just go up in a few weeks.

But my question is whether there are other parameters that can also significantly reduce the effectiveness of monetary policy in a DSGE model? Using sensitivity analysis (one parameter at a time), I have not found a structural parameter like that so far besides the Calvo parameter.

I ask this question because VAR papers that find monetary policy to be ineffective mostly say it may be due to bad and poor institutions, and the discussion sometimes ends there as the VAR is not a structural model. So any reason for the ineffectiveness of monetary policy, in this case, will be speculative, at best.

So my question is; how does a weak monetary policy show in a DSGE model besides via a low Calvo parameter?

2

It’s a priori not clear which other parameters would qualify. For monetary policy to have bite, nominal rigidities are required. That explains the Calvo parameter, which affects the slope of the Phillips Curve.

3

Many thanks for the reply.

I understand. But I was wondering if there are other frictions or parameters that also make monetary policy not bite even when prices are sticky in the model?

So let’s say, for example, that the policy rate (directly controlled by the central bank) does not really affect other interest rates like the lending rate. So monetary policy is weak, and it shows in the data. My understanding is that:

  1. We would not know which parameter would capture this weak transmission in an estimated DSGE model (if it is captured at all).

  2. If the weak monetary policy transmission is captured by the estimated model, it will most likely be via the Calvo parameter.

Is my understanding here right?

4

There may be incomplete pass-through of the policy rate on other interest rates. But that would require a model with financial frictions.