Monetary policy analysis in a small open economy: Development and evaluation of quantitative tools

This doctoral thesis consists of four papers, the unifying theme of which is the development and evaluation of quantitative tools for purposes of monetary policy analysis and inflation targeting in a small open economy. These tools consist of alternative macroeconometric models of small open economies which either provide a quantitative description of the monetary transmission mechanism, or yield a mutually consistent set of indicators of inflationary pressure together with confidence intervals, or both. The models vary considerably with regards to theoretical structure, and are estimated with novel Bayesian procedures. In all cases, parameters and trend components are jointly estimated, conditional on prior information concerning the values of parameters or trend components.; The first paper develops and estimates a dynamic stochastic general equilibrium or DSGE model of a small open economy which approximately accounts for the empirical evidence concerning the monetary transmission mechanism, as summarized by impulse response functions derived from an estimated structural vector autoregressive or SVAR model, while dominating that SVAR model in terms of predictive accuracy. The primary contribution of this first paper is the joint modeling of cyclical and trend components as unobserved components while imposing theoretical restrictions derived from the approximate multivariate linear rational expectations representation of a DSGE model.; The second paper develops and estimates an unobserved components model for purposes of monetary policy analysis and inflation targeting in a small open economy. The primary contribution of this second paper is the development of a procedure to estimate a linear state space model conditional on prior information concerning the values of unobserved state variables.; The third paper develops and estimates a DSGE model of a small open economy for purposes of monetary policy analysis and inflation targeting which provides a quantitative description of the monetary transmission mechanism, yields a mutually consistent set of indicators of inflationary pressure together with confidence intervals, and facilitates the generation of relatively accurate forecasts. The primary contribution of this third paper is the development of a Bayesian procedure to estimate the levels of the flexible price and wage equilibrium components of endogenous variables while imposing relatively weak identifying restrictions on their trend components.; The fourth paper evaluates the finite sample properties of the procedure proposed in the third paper for the measurement of the stance of monetary policy in a small open economy with a Monte Carlo experiment. This Bayesian estimation procedure is found to yield reasonably accurate and precise results in samples of currently available size.