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Article Type

Research Article

Abstract

A medium-size structural model is built in this article in order to define and reshape the Lebanese economy characteristics and features. However, the structural model is featured by a Taylor monetary policy rule design with nominal interest smoothing. Including the Taylor rule helped us to analyze the response function of each variables to different monetary policy shocks. Hence, the results of this paper showed how changing coefficients may influence the standard deviations of variables in the model as such the inflation rate, the nominal interest rate and the output GAP. More precisely, the performance of the model is detected while moving the coefficients assuming that monetary authorities’ intention is to reduce volatility in the three mentioned variables. Consequently, our findings proved that the coefficient of responsiveness to inflation deviations, the output GAP coefficient and the nominal interest rate coefficient are little bit larger than the ones reported in empirical works for the Euro area1. Therefore, these results reflect in some way that the Lebanese Central bank conduct its monetary policy with some responsiveness, in addition, findings ensure that actual behavior of the Lebanese central bank regarding the nominal interest rate setting is well captured by a Taylor rule including the initial proposed coefficients.

Keywords

structural model, Taylor rule, inflation rate, nominal interest rate, output GAP, DSGE, RBC

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