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Federal Reserve Bank of Boston
Working Papers
Towards a compact, empirically verified rational expectations model for monetary policy analysis
Jeffrey C. Fuhrer
Abstract

This paper extends the sticky-price models of Fuhrer and Moore (1995a,b) to include explicit, optimization-based consumption and investment decisions. The goal is to use the resulting model for monetary policy analysis; consequently, strong emphasis is placed on empirical validation of the model. I use a canonical formulation of the consumer's problem from Campbell and Mankiw (1989), and a time-to-build investment model with costs of adjustment. The restrictions imposed by these models, in conjunction with those imposed on prices and output by the Fuhrer-Moore contracting specification, imply dynamic behavior that is grossly inconsistent with the data.


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Jeffrey C. Fuhrer, Towards a compact, empirically verified rational expectations model for monetary policy analysis, Federal Reserve Bank of Boston, Working Papers 96-8, 1996.
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Keywords: Monetary policy ; Rational expectations (Economic theory)
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