Jesper Linde

• Board of Governors of the Federal Reserve System

This paper employs a two-country New Keynesian DSGE model to assess the macroeconomic impact of the changes in monetary policy frameworks and the fiscal support in the U.S. and euro area during the pandemic. Moving from a previous target of “below, but close to 2 percent” to a formal symmetric inflation targeting regime in the euro area or from fle...

A resolution of the missing deflation puzzle is proposed. Our resolution stresses the importance of nonlinearities in price- and wage-setting when the economy is exposed to large shocks. We show that a nonlinear macroeconomic model with real rigidities resolves the missing deflation puzzle, while a linearized version of the same underlying nonlinea...

We develop a behavioral DSGE model which addresses the forward guidance puzzle. We then use the estimated model to assess if unconventional monetary policy tools such as negative interest rates, forward guidance, and asset purchases can provide efficient macroeconomic stabilization in a low nominal and real interest rate environment. While these to...

Many central banks have relied on a range of policy tools, including foreign exchange intervention (FXI) and capital flow management tools (CFMs), to mitigate the effects of volatile capital flows on their economies. We develop an empirically-oriented New Keynesian model to evaluate and quantify how using multiple policy tools can potentially impro...

In this paper, we study identification and misspecification problems in standard closed and open-economy empirical New-Keynesian DSGE models used in monetary policy analysis. We find that problems with model misspecification still appear to be a first-order issue in monetary DSGE models, and argue that it is problems with model misspecification tha...

We calculate the magnitude of the government consumption multiplier in linearized and nonlinear solutions of a New Keynesian model at the zero lower bound. Importantly, the model is amended with real rigidities to simultaneously account for the macroeconomic evidence of a low Phillips curve slope and the microeconomic evidence of frequent price cha...

We show that a fiscal expansion by the core economies of the euro area would have a large and positive impact on periphery GDPassuming that policy rates remain low for a prolonged period. Under our preferred model specification, an expansion of core government spending equal to 1% of euro-area GDP would boost periphery GDP by over 1%in a liquidity...

In this chapter, we discuss a number of challenges for structural macroeconomic models in the light of the Great Recession and its aftermath. It shows that a benchmark DSGE model that shares many features with models currently used by central banks and large international institutions has difficulty explaining both the depth and the slow recovery o...

This paper examines the effects of expenditure-based fiscal consolidation when credibility as to whether the cuts will be long-lasting is imperfect. We contrast the impact limited credibility has when the consolidating country has the means to tailor monetary policy to its own needs, with the impact when the country is a small member of a currency...

This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-ter...

This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary re...

This paper uses a New Keynesian DSGE model of a small open economy to compare how the effects of fiscal consolidation differ depending on whether monetary policy is constrained by currency union membership or by the zero lower bound on policy rates. We show that there are important differences in the impact of fiscal shocks across these monetary re...

This paper uses a two country DSGE model to examine the effects of tax-based versus expenditure-based fiscal consolidation in a currency union. We find three key results. First, given limited scope for monetary accommodation, tax-based consolidation tends to have smaller adverse effects on output than expenditure-based consolidation in the near-ter...

This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990-2009, a period which includes a full-scale banking crisis, we find strong eviden...

This paper studies the relationship between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. By using a panel data set for virtually all incorporated Swedish businesses over 1990-2009, a period which includes a full-scale banking crisis, we find strong eviden...

In this paper, we use Monte Carlo methods to study the small sample properties of the classical maximum likelihood (ML) estimator in artificial samples generated by the New-Keynesian open economy DSGE model estimated by Adolfson et al. (2008) with Bayesian techniques. While asymptotic identification tests show that some of the parameters are weakly...

This paper investigates the impact of the asymmetric shocks within a currency union in a framework that takes account of the zero bound constraint on policy rates, and also allows for constraints on fiscal policy. In this environment, we document that the usual optimal currency argument showing that the effects of shocks are mitigated to the extent...

We estimate a DSGE model which features both nominal rigidities and search and matching frictions in the labor market. We evaluate the importance of shocks to the e¢ ciency of the matching function in accounting for the recent behavior of the Beveridge curve. We …nd that matching e¢ ciency shocks are driving both the actual and the natural rate of...

This paper uses a DSGE model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. But given this fiscal free lunch, it is unclear why polic ymakers would want to limit the s...

This paper investigates the impact of the asymmetric shocks within a currency union in a framework that takes account of the zero bound constraint on policy rates, and also allows for constraints on fiscal policy. In this environment, we document that the usual optimal currency argument showing that the effects of shocks are mitigated to the extent...

We show how to construct optimal policy projections in Ramses, the Riksbank's open-economy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports our view that the model parameters may be regarded as u...

This paper formulates and estimates a three-shock US business cycle model. The estimated model accounts for a substantial fraction of the cyclical variation in output and is consistent with the observed inertia in inflation. This is true even though firms in the model reoptimize prices on average once every 1.8 quarters. The key feature of our mode...

The paper subjects seven structural DSGE models, all used heavily by policymaking institutions, to discretionary fiscal stimulus shocks using seven different fiscal instruments, and compares the results to those of two prominent academic DSGE models. There is considerable agreement across models on both the absolute and relative sizes of different...

This paper formulates and estimates a three-shock US business cycle model. The estimated model accounts for a substantial fraction of the cyclical variation in output and is consistent with the observed inertia in inflation. This is true even though firms in the model reoptimize prices on average once every 1.8 quarters. The key feature of our mode...

This paper uses a DSGE model to examine the effects of an expansion in government spending in a liquidity trap. If the liquidity trap is very prolonged, the spending multiplier can be much larger than in normal circumstances, and the budgetary costs minimal. But given this 'fiscal free lunch,' it is unclear why policymakers would want to limit the...

I show that a standard RBC-model can be used to explain why hours per capita decrease in response to a permanent technology shock when hours enter a vector autoregressive (VAR) in first differences and why hours increase when hours enter in levels. There are two parts to my argument. First, empirical evidence suggests that a positive permanent tech...

This paper studies the relation between macroeconomic fluctuations and corporate defaults while conditioning on industry affiliation and an extensive set of firm-specific factors. Using a logit approach on a panel data set for all incorporated Swedish businesses over 1990-2002, we find strong evidence for a substantial and stable impact of aggregat...

We show how to construct optimal policy projections in Ramses, the Riksbank’s openeconomy medium-sized DSGE model for forecasting and policy analysis. Bayesian estimation of the parameters of the model indicates that they are relatively invariant to alternative policy assumptions and supports that the model may be regarded as structural in a stable...

This paper calculates indices of central bank autonomy (CBA) for 163 central banks as of end-2003, and comparable indices for a subgroup of 68 central banks as of the end of the 1980s. The results confirm strong improvements in both economic and political CBA over the past couple of decades, although more progress is needed to boost political auton...

Sungbae An and Frank Schorfheide have provided an excellent review of the main elements of Bayesian inference in Dynamic Stochastic General Equilibrium (DSGE) models. Bayesian methods have, for reasons clearly outlined in the paper, a very natural role to play in DSGE analysis, and the appeal of the Bayesian paradigm is indeed strongly evidenced by...

This paper analyzes the forecasting performance of an open economy dynamic stochastic general equilibrium (DSGE) model, estimated with Bayesian methods, for the Euro area during 1994Q1-2002Q4. We compare the DSGE model and a few variants of this model to various reduced-form forecasting models such as vector autoregressions (VARs) and vector error...

This paper estimates and tests a new Keynesian small open economy model in the tradition of Christiano et al. [2005. Nominal rigidities and the dynamic effects of a shock to monetary policy. Journal of Political Economy 113(1), 1–45] and Smets and Wouters [2003. An estimated stochastic dynamic general equilibrium model of the Euro area. Journal of...

In this paper, we develop a dynamic stochastic general equilibrium (DSGE) model for an open economy, and estimate it on Euro area data using Bayesian estimation techniques. The model incorporates several open economy features, as well as a number of nominal and real frictions that have proven to be important for the empirical fit of closed economy...

Despite a surge in the research efforts put into modeling credit and default risk during the past decade, few studies have incorporated the impact that macroeconomic conditions have on business defaults. In this paper, we estimate a duration model to explain the survival time to default for borrowers in the business loan portfolio of a major Swedis...

There are many indications that formal methods are not used to their full potential by central banks today. In this paper, using data from Sweden, we demonstrate how BVAR and DSGE models can be used to shed light on questions that policymakers deal with in practice. We compare the forecast performance of BVAR and DSGE models with the Riksbank's off...

In this paper, we study the interaction between the real activity and the financial stance empirically. Using aggregate data, we find strong evidence of substantial spillover eects from our financial variable on the real economy. Given this result, we use a large micro data-set for corporate firms to develop a macro-micro model of the interaction b...

The Internal Ratings Based (IRB) approach for determining banks' capital adequacy is one of the cornerstones of the Basel Committee's proposed revision of the Basel Accord for banking regulation. This article presents the ideas behind the IRB approach and its fundamental features, and discusses the consequences of a number of its components for the...

This paper analyzes the forecasting performance of an open economy DSGE model, estimated with Bayesian methods, for the Euro area during 1994Q1-2002Q4. We compare the DSGE model and a few variants of this model to various reduced form forecasting models such as vector autoregressions (VAR) and vector error correction models (VECM), estimated both b...

The New-Keynesian Phillips curve has recently become an important ingredient in monetary policy models. However, using limited information methods, the empirical support for the New-Keynesian Phillips curve appear to be mixed. This paper argues, by means of Monte Carlo simulations with a simple New-Keynesian sticky price model, that single equation...

We try to asses the role of housing price movements in the optimal design of monetary policy rules. Even though the relevance of liquidity constraints for consumption behavior has been well documented in the empirical and theoretical literature little attention has been given to credit frictions at the household level in the monetary business cycle...

This paper uses an estimated open economy DSGE model to examine if constant interest forecasts one and two years ahead can be regarded as modest policy interventions during the period 1993Q4-2002Q4. An intervention is here defined to be modest if it does not trigger the agents to revise their expectations about the inflation targeting policy. Using...

In this paper we use a Dynamic Stochastic General Equilibrium (DSGE) model for an open economy to examine the role of sticky prices in explaining the joint behaviour of inflation and a fairly large set of macroeconomic variables. We find that price stickiness is an important feature for firms active in the domestic, export and import sectors, even...

This paper uses an estimated open-economy dynamic stochastic general equilibrium model for the euro area to examine if during 1993Q4-2002Q4 constant interest rate forecasts (CIRFs), commonly used by inflation-targeting central banks, are viewed as being in line with the central bank's historical policy behaviour. In the sense of Leeper and Zha (200...

Recent work on the effects of permanent technology shocks argue that the basic RBC model cannot account for a negative correlation between hours worked and labour productivity. In this Paper, I show that this conjecture is not necessarily correct. In the basic RBC model, I find that hours worked fall and labour productivity rises after a positive p...

Monetary policies of the ECB and US Fed can be characterised by Taylor rules, that is both central banks seem to be setting rates by taking into account the output gap and inflation. We also set up and tested Taylor rules which incorporate money growth and the euro-dollar exchange rate, thereby improving the fit between actual and Taylor rule based...

Macroeconomic and microeconomic data paint conflicting pictures of price behavior. Macroeconomic data suggest that inflation is inertial. Microeconomic data indicate that firms change prices frequently. We formulate and estimate a model which resolves this apparent micro - macro conflict. Our model is consistent with post-war U.S. evidence on infla...

The relative importance of foreign and domestic shocks for the Swedish postwar business cycle is examined in a neoclassical stochastic growth model of a small open economy. Since recent research has shown that fiscal policy shocks may be important for business cycles, I extend previous work in the literature by allowing for stochastic fiscal policy...

We develop a structural model of a small open economy with gradual exchange rate pass-through and endogenous inertia in inflation and output. We then estimate the model by matching the implied impulse responses with those obtained from a VAR model estimated on Swedish data. Although our model is highly stylized it captures very well the responses o...

Recent work on the effects of permanent technology shocks argue that the basic RBC model cannot account for a negative correlation between hours worked and labor productivity. In this paper, I show that this conjecture is not necessarily correct. In the basic RBC model, I find that hours worked fall and labor productivity rises after a positive per...

The new Basel II regulation contains a number of new regulatory features. Most importantly, internal ratings will be given a central role in the evaluation of the riskiness of bank loans. Another novelty is that retail credit and loans to small and medium-sized enterprises will receive a special treatment in recognition of the fact that the riskine...

Technical appendix for the Review of Economic Dynamics article

Despite a surge in the research efforts put into modelling credit risk during the past decade, few studies have incorporated the impact that macroeconomic conditions have on business defaults. In this paper, we estimate a duration model to explain the survival time to default for borrowers in the business loan portfolio of a major Swedish bank over...

Counterpart risk rating is at the heart of the banking business. In the new Basel II regulation, internal ratings have been given a central role. Although much research has been done on external ratings, much less is known about banks´ internal ratings. This paper presents new quantitative evidence on the consistency of internal ratings based on pa...

The Internal Ratings Based (IRB) approach for capital determination is one of the cornerstones in the proposed revision of the Basel Committee rules for bank regulation. We evaluate the IRB approach using historical business loan portfolio data from a major Swedish bank for the period 1994 to 2000. First, we estimate a duration model that takes int...

Recent research have provided evidence that backward-looking models fit the data well while purely forward-looking models seem to be inconsistent with data. Consequently, many recent papers in the monetary policy rule literature have used "hybrid" models, which contain both backward- and forward-looking components. In this paper, I demonstrate that...

We examine the effects of government redistribution schemes in an economy where agents are subject to uninsurable, individual specific productivity risk. In particular, we consider the trade-off between positive insurance effects and negative distortions on labor supply and saving. We parameterize the model by estimating productivity processes on S...

The Internal Ratings Based approach for the determination of required buffer capital is one of the cornerstones in the proposed revision of the Basel Committee rules for bank regulation. This paper is an attempt to empirically evaluate the IRB approach using historical business loan portfolio data from 1994 to 2000 for a major Swedish bank. In part...

This paper investigates the relative importance of foreign and domestic shocks for the Swedish postwar business cycle in a neoclassical stochastic growth model of a small open economy. We extend previous work in the literature by allowing for stochastic fiscal policy, since recent research has shown that fiscal policy shocks may be important for bu...

We examine the effects of government redistribution schemes in an economy where agents are subject to uninsurable, individual specific productivity risk. In particular, we consider the trade-off between positive insurance effects and negative distortions on labor supply. We parameterize the model by estimating productivity processe on Swedish and U...

The authors examine the effects of government redistribution schemes in an economy where agents are subject to uninsurable, individual specific productivity risk.

and participants at Banque de France workshops and T2M con-ference for comments and suggestions, and S. Basu for sharing his data. Special thanks to P. Fève and an anonymous referee, whose detailed comments on an earlier draft greatly improved the paper. The remaining errors are ours. The views expressed herein are those of the authors and do not n...

We report estimates of the dynamic effects of a technology shock, and then use these to estimate the parameters of a dynamic general equilib- rium model with money. We find: (i) a positive technology shock drives up hours worked, consumption, investment and output; (ii) the positive re- sponse of hours worked reflects that the Fed has in practice a...

We describe a strategy for fitting a multiple shock, dynamic general equilibrium model to the data. In this draft, we describe results for a version of the model with monetary policy shocks and with persistent shocks to technology. The model does well at reproducing the dynamic effects of these shocks.

This paper analyzes the forecasting performance of an estimated open economy DSGE model for the Euro area during 1994Q1−2002Q4 . We compare the DSGE model to various reduced form forecasting models such as VARs, BVARs, and random walks. Several univari- ate and multivariate measures of out-of-sample accuracy are employed. Both point forecasts and t...

We estimate a DSGE model that features nominal rigidities and search frictions in the labor market. We evaluate the importance of mismatch shocks in accounting for the recent behavior of the Beveridge curve. Our …ndings suggest that the rise in the unemployment rate during the Great Recession is mainly due to cyclical factors rather than to an incr...