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Monetary regime change and business cycles


Abstract: This paper analyzes how changes in monetary policy regimes influence the business cycle in a small open economy. We estimate a dynamic stochastic general equilibrium (DSGE) model on Swedish data, explicitly taking into account the 1993 monetary regime change, from exchange rate targeting to inflation targeting. The results confirm that monetary policy reacted primarily to exchange rate movements in the target zone and to inflation in the inflation-targeting regime. Devaluation expectations were the principal source of volatility in the target zone period. In the inflation-targeting period, labor supply and preference shocks have become relatively more important.

Keywords: Business cycles; Monetary policy; Foreign exchange rates; Inflation (Finance); Equilibrium (Economics); Stochastic analysis; Econometric models;

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Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2007

Number: 294