Numerical Simulation Of The New Keynesian Model With a Taylor Rule
Abstract
We simulate the impulse-response functions in a New Keynesian model with the Taylor rule to characterize the dynamics of production and inflation that emanate from some exogenous disturbances (aggregate demand and supply and financial turbulences). The simulations for certain calibrated parameters show that the monetary authority must prioritize the ‘inflation target’ (central bank ‘hawk’) over the ‘production target’ (central bank ‘dove’). This strategy is the best in terms of the adverse effects caused mainly by exogenous monetary events. Furthermore, if the degree of persistence of the disturbances is minimal, less time is required to return to steady state.
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