East Asian Economic Review

Korea Institute for International Economic Policy (대외경제정책연구원)
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A Comparison Analysis of Monetary Policy Effect Under an Open Economy Model

  • Received : 2018.01.29
  • Accepted : 2018.04.16
  • Published : 2018.06.30
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Abstract

The paper analyzes and compares the effects of domestic monetary policy using DSGE, DSGE-VAR, and VAR based on a two-country open economy model of Korea and the U.S. According to impulse response analysis, a domestic interest rate hike raises won value in the case of DSGE and DSGE-VAR models, while in the case of the unrestricted VAR model, it lowers won value. In the marginal data density standard, DSGE-VAR (${\mu}=1$) is superior to DSGE or Bayesian VAR over the sample period. Conversely, in the in-sample RMSE criterion, especially for the won/dollar exchange rate, VARs are superior to DSGE or DSGE-VAR. It is necessary to study further if these differences are caused by model misspecification or omitted variable bias.

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