Survey_AB_2005

Abstract

We consider a well-known monetary policy model of a representative consumer and firms in monopolistic competition facing restrictions on the frequency of price adjustments (Calvo (1983)). Following Rotemberg (1987), this is often referred to as the ‘New Keynesian’ model, that has frequently been studied in the literature, e.g., Clarida, Galí and Gertler (1999) and Woodford (2003). We augment this otherwise standard monetary policy model by explicitly imposing the zero lower bound on nominal interest rates. We calibrate the model to the U.S. economy employing the parameterization of Adam and Billi (2004), which is based in turn on the results of Rotemberg and Woodford (1998) and our estimates of the U.S. shock processes for the period 1983:1-2002:4. The parameter values are summarized in table 1 and serve as the baseline calibration of the model. The implied steady state real interest rate for this parameterization is 3.5% annually. Throughout the paper variables are expressed in terms of percentage point deviations from deterministic steady state values. Interest rates and inflation rates are expressed in annualized percentage deviations, while the real rate shock and the mark-up shock are stated in quarterly percentages.