Output, inflation, and interest rates in an estimated optimizing model of monetary policy

This paper examines the impact of sticky price and limited participation frictions, both separately and combined, in a dynamic stochastic general equilibrium model. Using U.S. data on output, inflation, interest rates, money growth, consumption, and investment, likelihood ratio tests and Bayesian pseudo-odds measures reveal that the data prefers a model with both structural features. Our results also show that the combined model mimics many important features of the business cycle. In particular, the model generates plausible impulse responses, and monetary policy shocks are responsible for only a modest amount of output, inflation, and nominal interest rate movements.