In this paper, we seek to characterize the dynamic effects of permanent technology shocks and the way in which European monetary authorities reacted to these shocks over the past two decades. To do so, we develop an augmented sticky price-sticky wage model of the business cycle, which is estimated by minimizing the distance between theoretical, dynamic responses of key variables to a permanent technology shock and their structural VAR counterparts. In a second step, we conduct a counterfactual experiment consisting to compare these responses with the outcome of the optimal monetary policy. A significant discrepancy emerges between these responses, suggesting the European monetary authorities might not have responded optimally to permanent technology shocks.
Sanvi Avouyi-Dovi and Julien Matheron
Classification JEL : E31, E32, E58.
Keywords : Sticky prices and wages, Taylor rule, Optimal monetary policy.
Updated on: 06/12/2018 10:59